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The Columbia University Libraries reserve the right to refuse to accept a copying order if, in its judgement, fulfillment of the order would involve violation of the copyright law. Author: New York post Title: The business cycle Place: New York Date: [1921] ^^' 9^'y'O I- I ^ MASTER NEGATIVE # COLUMBIA UNIVERSITY LIBRARIES PRESERVATION DIVISION BIBLIOGRAPHIC MICROFORM TARGET ORIGINAL MATERIAL AS FILMED - EXISTING BIBLIOGRAPHIC RECORD :, 119 N48 "S New York evening post. The business cycle ... evening post, cl921. 32 p. 2SP. New York, New York "The 'Business cycle' is one of the ... series of articles which appear in the Evening post ..." RESTRICTIONS ON USE: TECHNICAL MICROFORM DATA FILM SIZE: 5S^^^ REDUCTION RATIO : /£ ^ IMAGE PLACEMENT: lA (JIa) IB IIB DATE FILMED: (g-S-^S INITIALS: 2^ TRACKING # : //)5^ OSUGSi^ FILMED BY PRESERVATION RESOURCES, BETHLEHEM. 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The "Busiuess Cycle" is one of the many valuable series ftf- arlicl^s^ w^iicl^ Appear in the Evening 'i*ost aiid ''are received by its regular readers. These articJes are re- printed now because a wide demand has exhausted the editions of the Evening Post containing them. New York Evening Post 20 Vesey Street New York Citv THE BUSINESS CYCLE The "Bjitlnem Cycle" is one of the many yaluable series of articles which appear in the Evening Post and are received by its regular readers. These articles are re- printed now because a wide demand has CKhansted the editions of the Evening Po^t ffuntaining them« New York Evening Post 20 Vcscy Street New York City OOFY&IOBT. 1921. N.Y.SVfiNIKa£HMT, INC. \' r V. ^■^■!^^-™"tt .-ti VfS^ THE' BUSINESS^ CYCLE Prefatory Note This important series of articles on the business cycle was published in the Evenhig Post beginning October 17. It has naturally fallen into three parts in conformity with its object. One part deals with the theory and principles of the business cycle and includes articles by such well known economists as Prof. Wesley Clair Mitchell, author of "Business Cycles" ; Edmund E. Day, professor of eco- nomics, School of Business Adminis- tration of Harvard University; Ed- win Walter Kemmerer, professor of economics and finance in Princeton University; M. C. Rorty, vice-presi- dent of the Bell Telephone Securities Company and recently chief statisti- cian of the American Telephone and Telegraph Company; John E. Roven- sky, vice-president of the National Bank of Commerce in New York, and Leo Wolman, chief of the reseai-ch department of the Amalgamated Clothing Workers of America. The second part demonstrates the practical application of the principles of the business cycle to the manage- ment of business. It includes articles by Clarence M. Woolley, president of the American Radiator Company, and Mark W. Cresap, of Hart Schaff- ner and Marx, and interviews with F. L. Lamson, treasurer of the Norwood Tire and Rubber Company ; Henry S. Dennison, president of the Dennison Manufacturing Company; E. M. Herr, president of the Westinghouse Electric and Manufacturing Com- pany; Theodore T. Malleson, export manager for the Royal Typewriter Company; Sara A. Lewisohn of Adolph Lewisohn and Sons, and the managing executive of one of the largest department stores in New York, and an officer of the General Motors Corporation. The third part was designed to in- dicate the present position of the country in the business cycle. It con- sists of reports by bankers, wholesale merchants, and retailers, giving the business situation in their sections and the outlook for the future. The three parts of the series ran concurrently. The underlying pur- pose of the series has been to show business men that by correct eco- nomic thinking and an intelligent use of statistical material collected and placed at their disposal by various Government and private sources they can exercise a large degree of control over the course of the business cycle by forecasting the course of buslnoi»s. Prof. Mitchell, Prof. Kemmerer, and the other economists show that business inevitably follows a regular course from prosperity through crisis to depression, and that from depres- sion come revival and again pros- perity. The causes leading to the different phases of the cycle and the inevitableness of the progress are clearly explained. How a wider dif- fusion of economic knowledge among the business community and a con- firmed habit of correct economic thinking would tend to lessen the curves of the business cycle — to make the peaks of prosperity less high, but, on the other hand, to raise the level of the valley of depression — ^was tersely put by Prof. Kemmerer when he said, **I']conomic movements that are widely anticipated are thereby either prevented from taking place or modified in their occurrence." , But these statements of theory and principle would have been of little value if they had not been accom- panied by the interviews with busi- ness men, showing the practical ap- plication of the principles to the man- agement of business. These inter- views have been an invaluablis series of lessons to the business community on reading the signs of the times. ', w ^--■■" s.. -X i,-y -•*»■, '*^* 2) \13 ■* ^^ ^v ^^^ ' ^ THE BUSINESS CYCLE — iirr" CONTENTS • • ••«•--•• •• • .. . 21 A Business Policy for To-day by MARK W. CRESAP. Bankers' Aid in Stabilizing Business by EDWIN WALTER KEMMERER 14 Bankers Can Check Depressions by EDWIN WALTER KEMMERER................. 18 Business at Crest and Trough ..j^.-^ 20 Business Cycle Sure Guide to Future by WESLEY CLAIR MITCHELL .,...,..^v-..r....* 5 Business Needs Right Men on Job by MATTHEW C. BRUSH .^-. ^ 30 Business Revival Expected to Gather Momentum in Immediate Future by WESLEY CLAIR MITCHELL 7 Charting a Big Business Through a Price Decline, An Interview with E. M. Herr by FRED B. PITNEY. Control of Business Fluctuation a Need, ■ » . • . «• ■« < >'•!•"»■■• "•I 26 8 Cycle in Industrial Output Revealed by Production Records by EDMUND E. DAY .,.., lo Effective Means of Lessening Severe Business Depression Possible by WESLEY CLAIR MITCHELL ^ . ..^, ,.,^^ 8 "Guessworkers" Do Not Survive Business Crisis by SAM A. LEWISOHN ••...:.._. 28 Half Century of American Business (Graph.) . •^^^•w*^. 5&6 How a Big Toy Firm Handled Itself in Anxious Times by J. LIONEL COWEN .,^.-,-...,_^ 29 How One Exporter Foresaw Business Decline Abroad by THEODORE T. MALLESON .v.....*.*-- 25 How the Business Signals Read To-day / Summary of a Symposium Covering 26 States...... «.vv*n*-»«: 31 Labor Experiences "The Cycle" by LEO WOLMAN . io Lessons Learned by Du Pont Co. in Recent Slump An Interview by FRED B. PITNEY •.-.-.-.-. . . 27 Lessons Learned ; Business Cycle Guides One Firm Through Crisis by CLARENCE MOTT WOOLLEY 17 Running a Big Retail Store as Prices Decline .-.-^.. . 22 Summary of Symposium on Business Conditions 31 Things Business Should Know by JOHN PALMER GAVIT 12 The Business Cycle and Everyman's Job ig Uncertainty Causes Ups-and-Downs of Business Cycle by JOHN E. ROVENSKY 24 •*We Mustn't Go It Blind Any More" by JOHN PALMER GAVIT n **What Shall We Do Then?" 12 .Wrong Ideas Must Be Liquidated by M. C. RORTY jg '. /■■■■■■"■:■■ •? VI \ \ THE BUSINESS CYCLE BaUllons of transactions year after year. What Pig Iron Shows Ev«n these series, however, seldom throw the cyclical factor into hii^ relief when taken in the raw state. The most striking feature of a chart showing pig-iron production (see page 00) in the United States is the rapid rate of growth from decade to decade. In a chart of American prices the out- standing features are the effects of great wars and the long-period swings In the purchasing power of gold. In a chart showing the value of the cot- ton crop the effects of the weather are clearer than the effects of pros- perity or depression. To trace the course of business cycles dearly it is necessary to set aside the influence of euch other factors as can be isolated —particularly the factor cf growth and seasonal fluctuations. And after that has been done it is best to trust no single index of business activity, but to combine several of the most significant indexes into a single series. How the effects of other factors can be excluded is illustrated by the two charts of wheat and pig-iron produc- tion. Here the growth factor is rep- resented by a straight line about which the yearly production oscillates. The 754,000,00.0 bushels of wheat which it la estimated are harvesting in 1921 would have been impossible under the best weather conditions in 1890, but it is somewhat below the "normal" ex- pectation for this year, just as tho 399,000,000 bushel crop of 1890 was somewhat below normal for that year. So, too with pig iron, which has a much more rapid factor of growth. The best indication of activity in the iron trade is given by comparing the actual output of the current year, not with the output of any previous year but with the output indicated for the current year by the line of "secular trend." These deviations of the ac- tual record of each year from the normal expectation for that year can readily be computed for various sta- tistical series, reduced to a common denominator by comparison with their respective "standard durations," and then combined to make a single curve. Excluding Seasonal Fluctuations By an analogous but slightly more elaborate analysis seaeonal fluctuaiicns can be excluded. Many branches cf business are regularly more active in certain months than in others. The average magnitude of these swings can be ascertained if one has monthly figures covering a sufficient number of years. Then the normal ex- pectation for any month is shown, not by a steadily rising line of secular trend, but by a wavy line, which may be higher in (say) October of each year than in the following December. These methods of analyzing business experience have been developed most fully by Prof. Warren M. Persons of the Harvard Committee of Economic Research. By applying these methods over a longer period of time than that covered by the Harvard group, Emer- son VV. Axe has constructed the chart showing "A Half Century of Ameri- can Bu.sine.ss," which rum* across the top of this page. The statistical series used by Mr. Axe and the relative "weight" allowed to each aeries in ar- riving at the final results are as fol- lows; Weights. Outside clearings 25 I'ig-iron production 20 Hailroad traflSc 16 Failures 10 Copper production 6 , Cotton consumption 10 Coal production 5 Commodity prices 10 Total weights 100 Some of these series do not exttnd back to the earlier years covered, in- deed the line from 1877-1884 is based on pig-iron production alone: and it is not until 1903 that all eight series are available. What the Chart Shows This chart is a graphic summary of the cyclical oscillations of Amer- ican business above and l)elow the [normal expectation for each year A Half Century of American Bnsiness — General Business Activity Compared with Estimated Normal. a?HB^ BUSINESS CYCLER}} ..J^iSSSSL^^SJ^ f .,.- .».^ .7.,. ,7.. „,, ,y,o r7,y iipjiw mil i^» IT** 17*T ^^H y —1^ ' i "^ 1 _/>i HI 55p^iEiSi^ 5 i^^li\ -: ■ i ^ ■■« .1 It _ ,1 artial share in the European crisis of 1900, our own "rich man's panic" in 1903, the revival that started in the autumn of 1904 and grew into the boom of 1906, the crisis of 1907, the rapid revival of 1908-9. the reaction in 1910-11, the improvement in 1912 the return of dulness in 1913 merging into the deep depression of 1914, the upward rush to a new peak of pros- perity in 1916, the diflicultit-s of main- taining business at this peak after we eiitsred the war. the brief depression tnat followed the armistice, the new boom that surprised us in 1919, the turn of the tide in 1920, and the deep depression of 1921 — a trifle deeper than any of its predecessors shown by the chart. No one who studies this chart ^Wi a realization of the vast mass oi practical experiences which it sums up year by year can doubt that business is really subject to cyclical osciUa^ tions. The chart gives no warrant for thinking of the business cycle as a strictly uniform sequence of precisely the same phenomena. But it does suggest that if the oscillations of the near future follow the precedents of fifty years the now vacant column foe 1922 will be filled in by a line not un- like the lines of 1879, 1885. 1897. 1904-5, or 1908-09. Such a line as that of 1915 is scarcely to be «xpected>An(| i scarcely-4jo be-iiesired, ^ Business Revival Expected to Gather Momentum in Immediate Future Steps Toward Recovery Are Outlined r By Wesley Clair Mitchell Current statistics interpreted in the light of pa.st experience indicate that American business is now in the early stages of recovery from a year-long depression. The normal expectation iji that such a revival will gradually gather momentum and develop into a revival to find its general charactens- tics and then inquire how present conditions differ from those amid which other revivals began. When Hard Times Come A period of hard times is character- ized by ii fall of prices fo;- commodl- tips, securities, and labor; wide.spread idleness of men and machines; a period of full-blown prospeiity. Ho hshrinkasp in both family and business Uiiich was shown by the first arti< le demand for almo-sl all cla.Kse.s of goods: in this series. But it was also shown that no 1901 -HOI tin ijoy- tios 1904 ij9i ijoa 1905 1910 1911 i9ta 1915 i9it i^'s 191*. 1917 1918 1919 1920 192J ijzz iw* mt two business cycles run exactly the same course. The revivals of 1879-80. of 1885, of 1897, of 1904-05. and of 1908- 09 are all precedents to which we may appeal in judging the present case; but these precedents differ in im- portant respects. The rate of iminove- ment was much fustei- in some of these instances than in others. While most of these revivals were preludes to business booms, the jirosperity that followed the revival of lltOS-OO Avas neither intense nor lonii sustained. And there are more sliiking cases of disappointment: the Rood times brought back by the revival of 1S91 were cut short by the pani< of IS'.t:;, and the revival of 1895 relapsed miser- able into renewed depression. The real conclusion to be drawn from experience, then, is that each phase of each business cycle has its individual idiosyncrasies as well as its- family resemblances. Tliat conclusion estops us. from any summary aii)»li»i*- tion of past precedents to the present case. But it does not estop us from an analytic use of the lessons of ex- perience. For most of the idiosynt ra- .sies of past revivals, booms, crises, and depressions can l)e explained hy careful study of the conditions that preceded or accompanied them. Ac- cordingly, to learn all that we can from the past about the near future we must analyze the process of business I a gradital depletion in the condition of I clothing, house furnishing.s, and much pquipment used in business; a reduc- tion in the stocks of goods carried by merchants, manufacturers, and dealens in raw materials: a pariuK of produc- tion costs by increa.sed exertions on the part of management and labor; a liquidation of business debts and a writins off of losses, a contraction of bank loans, an increase of bank re- serves, and a decline in discount rates. In the early stages of depression these conditions work cumulatively to reduce bu.siness activity, iiul after a l)eriod thai \arii's in lens'-'" with the dniaiion and chuiactei of the |)ieced- ing boom, ceitalii of thos'-> conditions lead to a sligiil but significant in- cicase in the volmne of Hide. Shoes atid suits, house furnishing'^, and busi- ness accessories gradually wear out beyond the ])ossi'>ility of repaii'. These are examples ol' a wide variety of setni-durable good:- which we make last longei- in hard times than flush, but which we have to ier>la.e alter a while, however Cionomical our mood. When that time « omes, the retail stores and supply house." note that business is picking up a tiific. Mean- while the rerices. Confidence incroa.«ef, among ail clas.ses, security prices reflect the prospect of better profits, construc- tion work of all soits is added to tlie growing demand, and the revival passes over into prospcrits'. Now, this is a generalized sketch of such a revival as has just started among ns. A moderate increase of buying is reported from numerous sources; unemployment has been re- duced a bit more than the seasonal trend will account for; wholesale prices have stiffened in many lines, and the most sensitive index numbers are rising slowly; "sentiment" is less that they could get the credit they needed under crisis conditions. The device of issuing clearing house loan certificates was an Ineffective. measure I .J- \ ■r^ \ r r -iC* i-we^ - ^SfLii, — *'■* ^ THE BUSINESS CYOiIe '■if PeMknlsUc. All this conforms to the reneral rule of revivals. But what are the peculiar circumstances of the time that wlU give this movement its apecial features, making it rapid or v!^'«^****"°"« or feeble, prolonged or brief? That question la hard to an- ew because many of the data on Which an intelligent judgment might be based are not yet available. Still weare not altogether in the dark First, the batiking situation is pe- culiar. The depression has been ex- ceedingly severe, but the crisis imme- diately preceding it was very mild in comparison with American precedents. ?a->5® ^®''* °° spectacular failures in 1920 no runs on great banks, no re- strictions on the withdrawals of de- posits, no moratoria. no closings of stock exchanges. Embarrassed con- «,T ^.VtJ^°^ ^°^*^®^ to so into bank. ^ ruptcy if they could be saved. While the number of failures in- creased, it did not reach half the av- erage number of 1913-15. On the face or the statistical record there are few conspicuous signs of th» enormous ■tress to which the finaiwl*' machinery was subjected. Of course, this ability of the new fcanking organization to withstand the •tress is most reassuring. But the re- Msurance counts more when we are ttinking of the next crisis than when we are thinking of the present re- vival For our old banking system served very well in periods like the ^!^^^}.- ^^ *^® liquidation of financial Obligations was destructively violent it was at l^t thorough. Weak con- cerns died promptly; they were not f^I^t^ through a lingering illness in tue hope that they might eventually recover. ' The present period of liquidation has certainly been long, but we do not know whether it has been thorough. Only time can teU whether the method Of panic financiering" which we have practiced for the first time has put us to as good a position to recuperate as the more drastic methods into which we vsed to be forced by the lack of a centralized reserve. Bank loans have Shrunk, reserve ratios have risen, and discount rates have declined, but the present discount rates are high in comparison with those which pre- vailed, say. in the summer of 1908. And there may be still a large number or weak concerns on the verge of a final collapse. Probably there is no one man in the country who really knows just how thorough the liquida- tion has been. Price Decline Uneven A second peculiarity is the uneven- ness of the violent fall in prices which has characterized the depression.' The prospects of a revival depend in large part upon such an adjustment among the prices of transportation, labor, raw materials, ajid finished commodi- ties as promises at least moderate profit margins in all the main branches of business. The price readjustments made dur- ing a period of depression, it is true, never restore quite the same rela- tions among different classes of goods as prevailed in the preceding period of prosperity. It is true also that the comparisons we are nowadays mak- ing with the pre-war prices span a long period— usually the eight years since 1913. It would be foolish to expect any close approach to the pre- war alignment. Yet the discrepancies revealed by every exhibit of the fig- ures raise doubts as to whether the present price situation is even mode- rately stable. It seems probable that further readjustments must be made. Once more, American' revivals Iiave often been prompted by a keen for- eign demand for our goods. Such was notably the case in 1879, 1891 and 1897. We can expect little such outside help at present. Severe as our depression has been, the Lnited 6>tates is in a far more fortunate condition than any of the great for- eign countries, financially and indus- trially. Recuperation in this country may help business to revive in taxi- rope; but a lively export demand se< ms unlikely to come to our aid. And foregn trade has become a more important factor in American busi- ne.ss than It was before the war. The uncertain political factor also bulks uncommonly large at present. In some measure revival waits upon the settlement of the tax problem, the tariff problem, and the financial relations between the Government and t.ie railways, to mention only the chief issues in suspense. The most encouraging of the pe- culiarities of the present situation is the latent demand for construction of whi(.-h We have been talking since the armistice was signed, but which has not yet materialized to any large de- ?''^f-, We have not had an active building year, counting construction in physical units instend of dollars since 1916. A great deal of building! painting, road-making, and the like needs to be done, and once business cond tions become favorable work should begin on a liberal scale What will be the net r^sultaijt of all these conditions upon the progress of the revival is not clear. If the finan- cial house cleaning has not been thorough we may repeat the experi- ence of 1892, when a premising eS- pan.sion of business wa« checked by a sudden renewal of suspended liqui- dation If the price readjustments are not even enough to enable most industries to share in the revival we may repeat the disappointment of 1895. But It seems probable that neither of these dangers will become disasters. i'^r. ?I ^°uf '^." ^''^^e- we can attain a considerable increase of attivity with exports at their present level The political problems must rea<-h solutions of some sort before long, and the solu- tions are not likely to he as bad as the present uncertainties. All in all, then, the chances seem to favor the further progress of the re- vival in the immediate future. But this progress is likely to be slow at least for some months to come ^ J' ^ October 19 Effective Means of Lessening Severe Business Depression Possibl Control of Business Fluctuation a Need By Wesley Clair Mitchell The depression from which we are tieginning to emerge has had one most hopeful feature — the development of a constructive Interest in the question Whether such periods cannot be pre- vented from recurring in the future, Or at least be rendered less severe. The long history of business cycles, rouirhly one century in the United States and two centuries in England, Aoea not prove that the problem of / control is hopeless. On the contrary, this history supports the belief that carefully devised measures taken in season may accomplish substantial re- tnUs. Indeed, substantial results have already been achieved in controlling one phase of the business cycle. Crises in England formerly grew into panics. But their centralized banking system enabled the Rngllsh to develop a plan of "panic financier- ing which has proved effective m every crisis since 1866. The vital feature of this plan Is giving practical aaaurance that every business enter- z' prist, not actually insolvent can, by paying a stiff rate of interest, obtain ♦Z^"'* '2.^"^ ^° meet its maturing liabUi- tles. This assurance suffk-ed to pre- vent the spread of panicky fears among business men, however dark the prospect in other respects. A mark,Mi change -. the character of ^ British business cycles was produced by this new policy. Crises lost much of tneir dramaOc intensltv, and the subsectuent depression bi^e the matter of chief concern. In this country the organization of the banking system long made It Im- possible to assure solvent borrowers 4«^ ,► / # »i h k < n > \< k THE BU8INESS CYCLE tl In comparison with the siupenslon of the law limiting the "unsecured" cir- culation of the Bank of England. Consequently, we had real panics In 1873, 189.^, and 1907. But the estab- lishment of the Federal Reserve Sys- tran in 1914 put American banks in a position to help solvent yet embar- rassed business liouses as effectively as the English banks help their cli- ents. Hence our crisis in 1920 was much more like the crisis of 1907 in England than like the crisis of 1907 in this country. Our first application of this plan of panic preveation may prove to be less skilful in some de- tails .^han British piactices based on half a century of experience; but if we have made mistakes, they are mis- takes by which we shall profit on the next occasion. We have learned, then, how to miti- gate the violence of crises. The next step is to devise methods of mitigating the severity of depressions. Several such methods have been proposed. Though not yet tried on a large scale, some of the proposals rest on a care- ful study of experience and merit thorough consideration. Concerning one line of action there is no room for doubt. The more men of affairs understand the cyclical fac- tor in business activity the more they plan to take advantage of the oppor- tunities it presents for gain and to avoid the losses it threatens, and the better the data at their disposal for judging business prospects the less violent will oscillations become. When a future danger is so clearly perceived that every one prepares to meet it, that danger seldom proves serious. A notable illustration is afforded by the extraordinary fall of prices in 1865. Every one expected that when the Confederacy collapsed the credit of the Federal Government would improve, that the United States notes which were the standard money of the day would rise in value, and that prices would tumble. Of course tr.is antici- pated fall of prices was a grave dan- ger against which every business had to provide. Nearly all business men made such provision. The anticipated fall began In January, 1865, and it proved more violent than any pre- vious decline. Yet the fall of prices passed off without producing a severe financial stringency or a long depres- sion. No troubles occurred compar- able with those which accompanied the| corresponding drop of prices last year, although the banking system was by no means so well organized to with- stand a strain in 1865 as it was in 1920. Every measure which aid:; the busi- ness public to foresee coming dangers, as they did in 1865, will prove help- ful. In particular the statistical data which summarize current conditions should be, and can be, rendered far more useful than they are at present. Gaps in our knowledge should be filled in by compiling fuller statistics of stQcks of goods on hand and on order, of manufacturing output, of construction, of numbers of men at work part time, full time, and over- time, and of their earnings, of the leading factors affecting cost of pro- duction and fiuetuatlons in demand. Not less important is the effort to make the sometimes bewildering array of figures more intelligible and more significant. Finally, these more com- plete data in more intelligible form should be made readily accessible to all men minded to use them. Hap- pily, there are many active workers In this field — Government agencies, or which the Department of Commerce is especially progressive at present, business associations, scientific so- cieties, forecasting agencies, statis- tical departments in corporations, commercial periodicals, newspapers, and individual statisticians. We can count upon a gradual improvement both in the data and in the use made of them. A second proposal is the long-range planning of public works, municipal, State, and Federal. Much work of thig sort, it is held by competent judges, can be accelerated for a year or two or postponed for a similar period K'ith- out serious detriment to publl? in- terests. By systematic planning gov- ernments might diminish the amount of work they put to contract in years of great activity and increase the em- ployment they provide for labor and capital in dull years, thus reducing the intensity of both boom and depression. Besides Its other advantages, this plan has financial promise, since the cost of construction work is subject to a wide swing between the crest of prosperity and the trough of depression. Esti- mates made in this country and in England agree in indicating that the amount of work adapted to sdlocation In this way runs high In the millions. It is obvious that every dollar paid out in hard times would giv.-« rise to demands for goods on the par' of con- tractors and their employees. This plan is by way of being put into opera- tion on a small scale. In July 1917, Pennsylvania created an Emergency Public Works Commission to provide for the expansion of public works during periods of unusual unemploy- ment. California has enacted a similar law this year. Both experiments should be followed with attention. The Wisconsin Legislature has be- fore it another plan — the Ruber un- e? iployment prevention bill. The theory of this bill is that the cost of unemployment should br- treated as a fixed charge upon industry', and that if manufacturing plants which show wide fiuctuations in the number of men on their payrolls are forced to pay higher insurance premiums than the plants with steadier records they will soon devise methods of stabilizing th"ir working forces. Tliis theory is supported by the effects of k'gi«^lation compelliner employees to carry indu.s- trial accid'. nt insurance — legislation which has put a premium upon acci- dent prevention and, it is claimed, re- duced the cost of accident.s to em- ployers. The Hubor bili creates a mutual Insurance company which all manufacturing establishments in the State must .toin, and to which they will pay premiums varying with their •inemployment rates. The insurance company is to be managed by the pinployers, under rules approved by the State Industrial Commission. To be eligible for compensation for un- employment an employee must have worked at least half of the preceding year within the State and must have Vieen laid off by his emoloyer for no fault of his own. The rate of com- pensation is $1.50 a day for adults "nd 75 rents for workers under nine- teen years of a«e. The maximum period for which unemployment com- pensation can be drawn, is six weeks for the first three years of the act's operation and thirteen weeks there- after. If this bill is passed by th« \Msconsin Legislature it will provide us with another significant experiment. Meanwhile certain corporations have initiated schemes of insuring their em- ployees and stockholders against the effects of depression. ror example peering. AlUliken & Co. set aside tw«i sinking funds to gxiarantee a minimum r^u® <>^_ret"rn to both capital and labor. Operatives are paid current wages and investors are allowed 6 per cent interest on their capital. When current Income exceeds, what is neces- sary to meet these charges. 15 per cent of the excess earnings is put !nto the sinking fund for capital and 15 per cent into the unemployment guarantee rund. If any profits remain after the sinking funds have been provided for the surplus is shared equa'.ly between capital and labor. The capital sinking fund Is drawn upon to make up anv deficits below the 6 per cent interest late In lean years. The unemployment guarantee fund Is used to provide half pay for the operatives during periods of unemployment. A somewhat simi- lar scheme has been adopted by the Dennison Manufacturing Company and another method of attaining the same end Is being tried by the gar- ment manufacturers in Cleveland. The latter employers agree to provide at least twenty weeks of full-time provide this mucn work they agree to pay two-thirds of the wages that would have been earned in the period of Idleness, with the proviso that their payments for time lost shall not ex- ceed 7% per cent of the payroU. This plan obviously offers a strong finan- cial incentive to keep the workers em- ployed. Besides these direct schemes for re- ducing the extent or mitigating th« hardships of unemployment, varioua monetary and banking reforms are ad- vocated to reduce the violence of the cyclical oscillations to which business ^% "ow subject— further centralization of the banking system, stabilizing the dollar, raising Interest rates earlier or more rapidly in periods of prosperltv and the like. Into the intricate ar- guments for these proposals it Is im- possible to go here. But one point should be emphasized. Nearly all the well considered schemes for control- ling the business cycle, whatever their line of attack on the problem, agree m thus feature— that the remedy is to be .sought by shifting part of the ex- cess of the "boom" Into the period of depression. It follows that the beat time for effective prevenUve action comes before activity has reached that wasteful Intensity which produces busi- ness stresses and brings on a crisis. And the best time to formulate a wise preventive policy is a time like the present, when the ills of depression are fresh In mind and when the prob- lem can be studied with the necessary care. This consideration makes especially welcome the report that the Presi- dent's conference on unemployment has ap^ -ted a special committee to canva merits of the various pro- posal' leventing or mitigating fu- ture periods of business prostration. -Jfcp .■ N. I> I »» ^ "'k r-,-^ 6i\ *':^^5^^iiStess-'^icYaLB-4 \ :4 ^ . . IDciober'2a Cycle in Industrial Output Revealed by Production Records Extraordinary Fluctuations Due to Accidental Tempor- ary Causes Not Important By Edmund E. Day Prof««ior of EconomicF. School of Business Adminuistration of Harvard University Business men need no reminder of the prevalence of fluctuations in in- dustrial output. Recently radical cur- tailment has been the general order ot the day. Employees have been placed on abbreviated schedules when not actually discharged ; plants have been operated on part time when not com- pletly closed. Output has been at a minimum. Yet as i-ecently as the win- ter of 1919-20 opposite conditions pre- vailed. Manufacturers were then em- ploying every available means to in- crease production. Workmen were hired overtime to tend machinery driv- en at top speed. Production was at a maximum. ' Though variations of this sort form part of the universal experience of modern business enterprise, their na- ture and significance are rarely un- derstood. Fundamentally, fluctuations of industrial output are an integral part of the business « ycle. Bu.si- ness conditions at one stage of the cycle stimulate, at another stage enervate, efforts to increase produc- tion. The ups and downs of indus- trial output are essentially cyclical. The character of this cycle may be observed in the production records of any Industry for which continuous data are at hand. In the United states the iron and steel trade pro- vides .lust such a record. In the accompanying diagram on another page the monthly production of pig iron is shown graphicallv for the eighteen-year period from January, 1904. to September. 1921. (Chart 1\ Examination of the graph disclo.ses four distinct varieties of movement: (1) Sporadic disturbances, as in Jan- uary-February, 1918. and October- November, 1919: (2) a general up- ward trend running through the en- tire period; (3) a typical seasonal va- riation, under which tlie production of one month — c. g.. October— tends ■ to be greater than that of another months— €. g.. July: (4) a cyclical movement, showing now a crest, now a trough, in aggregate production Within the industry. Erratic Movemenls Unimportant In the study of the business cycle erratic movements may be dismissed with little comment. It is enough to know, for example, that the heavy decline in pig iron production in Jan- uary-February, 1918, was the direct consequence of the order of the United States Fuel Administrator clos- ing for thirteen working days dur- ing these two months in States east of the Mississippi all industrial plants not at work on Government contracts. TWe consequent sudden drop in pig iron production was merely a pau.se in the course of the cycle. Apparently it had no decisive influence. The same was true of the precipitous fall of production on account of the steel strike in October and November, 1919. At the time of their occurrence these fortuitous disturbances may entirely conceal the true course of the cycle. In retrospect they appear as nothing more than interruptions of the under- lying cyclical movement of produc- tion. The general trend disclosed by the graph reflects the normal growth of the industry from 1904 to date. This normal growth justifies the expecta- tion of a substantially larger output in 1921 than in 1014. Another indus- try might exhibit an entirely differe^nt long-time tendency. Thus the pro- duction of beehive coke shows a per- sistent downward movement since 1909, the result ol competition from by-jprodurt ovens. Fluctuations in the output of any industry occur around the level determined by thL* prevailing trend. This may be upward or down- ward, or of no discernible inclination but the possibility of long-time ten- dencies must he recognized and the effect of persistent growth or decline allowed for in the interpretation of current recoi-d? of production. Seasonal vaiiation apjiears in the characteristic differences of output for different months of the year. Thus typically. .Maich shows much greater pig-iron production than Feb- ruary. In part, this divergence is nominal, and arises not from a f hango in the activity of the trade but from the larger number of working da\s in March. Beyond this influence of tiie calendar, however, lies a leal season- al movement of trade activity. Spring and fall in the iron and steel indus- try show greater production than win- ter and .summer. Seasonal variation thus accounts for some of the lesser movements appearinj;- in the chart of pig-iron production. Existence of the Cycle When all necessary allowances have been made for fortuitous disturbances, long-time tendencie.s-, and character- istic .seasonal variations, there remains a strong wave-like movement in the production of pig iron from 1904 to date. The chart serves to throw this movement into bold relief. Even a cursory study of the records affords convincing proof of the existence of a (.ycle of production in the iron and steel trade. The cycle is not peculiar to this in- dustry. True, it is more etisiiy observed In the case of pig iron production, partly because of the nature of the trade, partly because of the excellence of the statistical record But similar fluctuations appear in the records of other fundamental industries wherever the data are available. Thue the volume of cotton manufacture is rep- resented since 1912 by raw cotton con- .sumed in the manufacture of cotton goods. The series, despite somewhat ^r«>iiter month-to-month deviations, exhibits unmistakably Ihe same cycle as pig iron production. Numerous other series show the same phenome- nu!i. In particular, the universality of tlie cycle may be obseived in a general Index of the volume of manufacture a,<5 a whole for the period from January, 1919. to July. 1921. This index, recently developed by the Haivard University committee on e< nnomic re^search, is basenc industry will be already experiencing reaction, while another seemingly enjoys com- plete prosperity. Thus, as early as May, 1920, the slump had begun in the textile trade. It was not until the fol- lowing November that production in tile iron and steel industry showed a marked decline. Whether these rela- tionships of the different traders are regular and persistent only further investigation will determine, but it is already evident that the phases of the evcle are not at all simultaneous throughout the industry, but are di- verisei.. timed. Finally, it seems clear that there is wide vaiiation in the amplitude of fluctuations in different industries. The iron and .steel trade is subject to extreme disturbances. The range between maximum and minimum pig- iron production is much greater thaa the range between maximum and min- imum cotton manufacture. The fluc- tuations of woollen and worsted manu- facture also seem to have a much greater amplitude than those of cot- ton. Other industries, such as tobacco manufacture, meat packing, and flour milling, show narrower variations thaa the textiles. Despite these siamiflcant differences in the various stouds of industries, the pervasiveness of the cycle is clear. The ups and down of industrial out- put are not to be charged to mone- tary and financial systems nor to polit- ical administrations. At critical jun^ tures governmental action may ■ haii- ten industrial movements of a funda- mental sort. But the cycle runs it« course under varying financial condi- tions and with little reference to th* fortunes of political parties. It con- stitutes one of the underlying influ- ences to which modem business enter- prise is ever subject. October 21 "We Mustn't Go It Blind Any More*' By John Palmer Gavil "Something in particular must have sent you out on the Boston Post Road in Norwalk in the spring of 1920 to count the spare tires on the rear ends of automobiles and see the bottom fulling out of your own business. What was it? ;]A hunch." "'Yes, but hunches don't come out of nowhere. Was your business falling oirr "No. It seemed to be growing. Everything looked all right.' "Then whence the hunch?" P. I* L^mson, treasurer of tne Nor- walk Tire and Rubber Company, pushed the papers aside on his desk, looked out from under his heavy black eyebrows, and closed one eye, not with a wink, but as one who wonders whether he'd better tell. "In order to answer that question I've got to go into a private family matter. Yes, home psychology." "Isn't this a time for all the cards face up? I guess domestic psychology lies at the bottom of all this business of 'business cycles, in the last analy- sis." "Well, all right, here goes. In 1919, when everything looked fine, didn't you sit with groups of men who pulled out the .flaps in pockets to show the date of the suit and boasted about the age of their clothes? Or turned up the soles of shoes to show you the holes in them?" "I did. I can do it yet." "That was men. Men stopped buy- ing, 'way back in 1919. Women didn't. My own wife didn't. She made her trips to New York pretty much the same. Prices were high, and the bills we paid showed it. When the A^omen Stopped Buying "But in the spring of 1920 the bills, with the same high prices and every- thing going apparently full speed, be- gan to fall off. My friends were notic- ing the same thing. Wives stopped making their trips to New York. They bought in Norwalk only what was ab- solutely necessary. 1 said to myself, 'It's all off; the women have stopped buying.' "Then was when I got the hunch to go out on the Post Road and see about spare tires." "People who used to carry three spare tires cairied only two?" "They didn't carry any! I didn't bother about the local machines; a man will take a little ride round town without any spare tire. And I didn't pay close attention to the Fords. I kept count of the big. expensive ma- chines with cliauffours. owned by men who had money for tires if they wanted to spend ii. Pierce- Arrows, Locomobiles, Cadillacs — all the high- priced machines, coming through from Ma.ssachusett.s, Penn.sylvania, Ohio, from long distances, touring. They didn't have any spares." "How long does it take for a con- dition like that to work from the con- sumer, through retailer, jobber and so on, back to the factory?" "Oh, maybe six or eight months. It begins gradually, almost impercepti- bly, gathers momentum but is not generally recognized until it reaches its peak — or rather, the bottom of the slump. It differs, of course, in dif- ferent lines of business." "But in the ordinary course of af- fairs, without anybody studying the tail-ends of automobiles, the manv* facturer has now no means of know* ing promptly, accurately, or perhaps even generally, that the buying pubUe is 'backing up' on him." "Exactly." "What did you do?" "Came right over here and got busy. M.v colleagues saw instantly what It meant. We acted accordingly; slack* ed up, got rid of surplus raw ntukteiial and generally prepared ourselves for the storm. "Of course, lots of other manufac- turers did the same kind of thing, on information and hunches, each in his own fashion. Lots of tliem didn't. The destructive force of the sma^h when it came affected the Individual concern in pretty direct ratio to the accuracy and sufficiency of the Information it had in advance." There was a lot more of tlie long and utterly candid talk with which Mr. Lamson favored me; . but it all had t« do with the vital necessity for ths ends of intelligent manufacturing an* planning for good times and bad, ot prompt and accurate mformatlon on the subject of business conditlonai» trends, and tendencies. We Mustn't Go It Blind "We mustn't go it blind, or depend upon gruesswork and bunches and in» spiratlons," said Mr. Lamson. "Ws must know. 'Take orders for automobiles, for ex- ample. Here came in tidings of several inQuirles for cars that c»uldn't be fill- ed because everybody was oversold. A man had gone to one agency; hs wanted a car right away. Couldn't get it under three months, or six. Nothing doing. He went to another. Same answer. And to another, and anoChor. t' ; I ^ ^ 11 12 THE BUSI^NESS CYCLE Finally he did manage to get one — one, mind you. That was all the cars that that man wanted. "But back lo each of the I ome of- fices went the news that reque;:^rs were pouring in, and each concern got the push of an apparent big demand. The salesmen, keen for commissiont?, plaj'ed it — sincerely enough — for all it was worth, and the factorie.s whipped up production. Information — there wasn't any. Yet if the information that ea< h (.oiiv ein had about its own ' business had be^n gathered, collated. and put forth pronnptly and clearin by I and put forth promptly and clearly by j ture would have saved us. in a consid- ! erable degree, from being misled. "Had such facts, properly set forth, . been available in 1*19 and 1920 the j wave of profiteering that almost ' rocked the foundations of our Govern- ! ment b.v creating widespread unrest ; and dissatisfaction among all classes. , and circulation — or anyway the ac- teptance — of the false information un- ; der the guise of statistics coming from sources Interested in the spreal of just such material, which led th« in* dustries of the nation into a. wild race of expansion and an orgy of produ^;- tion. leading unfailingly to a national depression and wastefulness and sac- rifii^e of capita] and an unprecedented recoid of unemployment, would un- doubtedly have been avoided." Mr. Lamson then went on to out- line his definite plan for gathering and exhibiting such information. This will be set forth in another article to-morrow. October 22 "What Shall We Do, Then?" The response of readers of the Evc- nltiii Post TO tho discussion of funda- mental economic law underlying the fluctuations of prosperity and depres- sion, which has been a feature of this newspaper duiing the past week, shows the keen desire of business folk of all classes to gain a clearer under- standing of the factors which govern success. Wesley Clair Mitchell's articles in- troducing the series of discussions to which other students of economics and of business in the concrete will here- after contribute have painted a large background for the specific opinions of bankers and business men. Wo think he has established to the undm- standing of any reasonable reader Ihe fact of the "Business Cycle." Ilcn- vlnipcd of the general principles i^ut v/ith an unsatisfied mind, because he does not see what they mean to hirn individually, in terms of to-day's defi- nite action. "This is all very well." he says to himself, "but I want to know what it means for me, here and now. What can r actuallj" do to fit my own busi- ness into the situation that all these fellows are talking about? What shall T do, personally, next".'" We think that the discussion of gen- eral principles and the detailed re- ports and opinions which the Evenin/j Post has thus far published make clear a'- least four things that any business man can do forihwith, and that they are the right things to do: (1) Study your business situation as it exists right now. Determine as ncarl.v as you can the conditions of supply ,ind demand for your pioduitt ;ind i;i\v materials in relation to the general curve of your industry and of general business (2) Assuming that you are faii'y well liquidated and ready to take ad- vantage of the slowly but steadily im- proving conditions, don't wait any longer, but enter now upon the ex- tensions, alterations, repairs, and additions to equipment that •>" '■"'* reasonably sure will be needou ... t ^ next few months. The poslilon i-i general, with some exceptions, is ad- vantageous in respect of both wajres and prices of materials. And you will incidentally be helping to lessen un- employment and accelex-ate the gen- eral revival. (S> Watch the market* for raw maieiials used in your industry, hav- ing in mind, not some abnormally low level of prices, but the general average level at 'which under normal conditions you can use them profita- bly. Make reasonable contracts on that basis for future delivery as your business gains momentum. This is no suggestion of an intensive "buy- ing week" or anything of the sort- Use your judgment and add courage. (4) With the coopei^tlon of your banker, extend credit judiciously, so that those through whom you have to distribute your product* can get under way also. Without any desire to whip up ^)usl- ne."?a or industry beyond the careful, really conservative, sane rate which present conditions justify, we believe that the time for hypter-caution and foreboding has passed, and that now is the time to act, to move forwarJ with courage. Things Business Should Know By John Palmer Gavit {This is the conclusion of mi intercieu- u-ith Atr. F. L. La in son. treasurer of the "Xonixilk Tire and Rubber Conipauy. of Morivalk. Conn., about the necessit/j of reliable and linielj/ information concern- ing rnanufac luring and business conditions. The first article was pub- lished ill the Evening Post ycsirrdaii.) "Coming down to brass tacks," !;aici Mr. Lamson. "it is easy enough lo ny that if we had known all about the .slate of affairs in industry before the storm broke upon us last year we not only could have lowered our "ears and set our brakes fot the steep downgrade ahead, but could even *havu gone far to avoid the steepness, of the grade altogether. We didn't know— that's no secret. "The question is. not whether we* 1 ___^ ought to have known, but wliat we ought to have known. And is it r.-ossiblc to know that? Is the infor- mation to be had, and it so, low can it be made practically available in simple form for the manufacturer or business man with intelligence lo see 2 and 2 making 4, so (hat he can un- derstand it and act upon if.' "If you were to come in here any time and ask me: " 'What is the normal productitht in your esinblishmenlf I couid tell you in.eiantly. ai:d 1 would. There's no great secret about it; men talk such things over at first meeting, on the commuters' trains, and wherever rhey meet 'And I would just as qulclcly antwer the other question: "What is the present produ^int toith reference to noimalt At what rercentage of your normal capuiity are you running now?' 'Very well; the answers to these questions, if you had them for any whole industry, would enable each concern to determine where it stood with reference to the whole indu«trv. And if you had the answers totalled for all the industnes of the count-y you would come pretty near knowing how things were going generally. ' li is essential '.n the planning of i k THE BUSINESS CYCLE < 'v*' 13 purchases and production to know also tht consumption of raw material, raw materials on hand, the jiv.ount of finished product produced, finished product on hand, and the principal product sold or distributed during a given period. "These details of his own situation the individual manufacturer might not be so ready to disclose; but if he knew the general situation in these respectR throughout his particular trade i* would be of the utmost value to him, and to the whole industry. Then sup- ply w^ould be more nearly harmonized with demand; the panicky buying and selling now in vogue would be lessened If not entirely eliminated; inefficient and Impulsive*^ production and selling policies would be more quickly and easily detected." Monthly Reports of All Industries 'Such information would have to b*f very much up-to-the-minute." 1 \entured. "The statistical machinery moves slowly, and " "It doesn't move slowly in the re- ports of the wheat and cotton crops, does it? Don't you newspaper men get those reports by telegraph, and right up to date?" "Tes. we do. Men wait on tip- toe, and try to steal the information in, advance." "W«ll, I would have this information gathered and made public not later than the loth of each month for the preceding month. That. I believe, would be often and prompt enough for the planning of industry and geneiai trading l)ased upon an accurate knowledge of the true conditions in each industry and In all Industries rombined — for the industries are in- terrelated to a very great extent. Ont should know as well the general back- ground of industry as a wholp. "Timeliness is as essential as arc the facts themselves." "Government is the only agency that , fan get such information," 1 «ug- 1 gested. "I think so. Certain people havi | favored the gathering of this infor- mation directly by oi with t'lp as-j distance of the trade associalionj;; but | 1 personally foresee re1iictan<;e on th^ j part c' individual concern- to expose, the 'innard.«s" of thoir laisinesj" 'o Iheii ' competitors. I tould give you some particulars of experience to support that idea, but " Scope of the Information Needed "What sort of questions would you iiave asked — whoevri- it was thai asked them?" "The monthly report that 1 would request from each concein would cover these points: (1) Principal and secondary prod- ucts, respectively. (2) Number of employees, male, female, children under sixteen, and grand total. Proportion of these, male and female, who are "common laborers." (.^) At what percentage of total maximum capacity is the plant now operating? (This should be estimat- ed on the normal production of the plant, assuming all conditions favor- able to production.) (4) If production is not maximum capacity, what arc the principal causes or limiting factors? (5) Principal raw inaterial con- .«iumed week ending "last pay day" — name, unit, quantity. (6) Principal raw material on hand "last pay clay"- — quantity. (7) Second principal raw ma- terial consumed, week ending "last pay-day," name, unit, quantity. (8) Second principal raw ma- terial on hand, "'asi pay-day." quantity. (9) Principal finished product produced week ending '"last pay- ija.v,'* unit, quantity. (10) Principal finished product on hand "last pay-day," quantity. (11) Second principal finished product produced. week ending "last pay-day," name, imit, quantity. (12) Principal products sold last calendar month, qtiantity. (13) Second principal products .sold last calendar month, quantity. (14) What percentage of produc- tion last month was on principal product? "The answers to these questions would Ibe reasonably accu?ate right favay: but one of the effect ■ of rfiich reports would be to acquaint oom<> in- du.strial managements nio.e closely with ihtfiv own conditions. Accuracy would steadily increase. Business men would quickly learn anything they are not minutely acquainted with now. It Would Disclose Unemployment "The number of employees on the factory payroll is the most accessible record in any plant. Suppose there were but thiee plants in a given in- c'.ustry, and that their answers .it the end of a certain month showed — (Mr. ijamson quickl.v sketched a table). Per cfiit Nuinb«r of em- Normal of capacit.T. ploye^s workinc- employment. 35 700 2.000 K.'i U50 t.OOO 85 850 1,000 "Instantly you would see that the industry at full capacity would em- ploy 4,000 persons; that the 2,200 rep- resented an average of 55 per cent of the normal. And you would see 1.800 as the number of unemployed at that moment in that industry. Cost of "Labor Turnover* 'We figure that every new employee brought into our industry costs ue $50 to train. That's one of the things that running below capacity and unem- ployment means for the industry; it points straight at the very great loss to industry of th» 'labor turnover,' J don't know what the education-cost of new emp!o;'ces is ir. other indus- tries, but there can be no question of its force as an argument for reducing 'seasonal unemployment.' "And the grand total of these figure* for all industfles would tell us about total unemployment In industries — what we now guess at. "Such a. plan as I have outlined would (1) make available planning statistics sufficiently complete, com- prehensive, and authoritative; (2) it would put producers, sellers, buyers, and the public all in possession of the same fundamental facts, consequently placing each interest in the same rela- tive position for trading. And (3) it would establish a confident? thai would contribute to a generous sup- port on the part of producers in se- en ting, disseminating, and contintiing permanently such information.'* October 24 Bankers Can Check Depressions In Advantageous Position to Know the Facts of Busines, They Can Take Action to Lesson the Bad Effects of Fluctuations of the Cycle or foui- years is a pioposition sup- , valuable book on 'Business Cycles" as ported by such an abundance of evi- j a process of "cumulative change by dcnce as to be accepted by most stu- 1 which a revival of activity develops dents of finance. Some of this evidence j into intense prosperity, by which this has been given in the preceding ar- , prosperity engenders a crisis, by which tides of this series. The general < hai - ' crisis turns into depression, and by nounced cyclical movements in busi-iacter of the cycle has l>een tersely de- 1 which depression, after growing mor*> ness with a normal periodicity of three ' fined by Wesley C. Mitchell in his ! severe for a time, finally leads to such By Edwin Walter Kemmerer. Princeton UaiTeraity. That there exist in the United States and other advanced countries pro- \ .V >Mtik»^kmA muii --J ii^,'.if^^*Vu. THE BUSINESS CYCLE THE BUSINESS CYCLE in m, revival of activity as that with which tbe cycle began." There ia no class in the community more vitally aifected by the busi- ness cycle tiian the bankers; there is probably no other class in such a favorable position as they to contri- bute towards the reduction of the •viis of the cycle. These evils are serious. The busi- ness cycle Is in fact essentially baa. It is an expression of alternating "nerves" and depression on the part of the body economic which would function more efficiently ana mord comfortably if it could maintain its composure. Both the banks and the businees public would be better off, for example, with stable interest rates than with alternatingly rising and tailing ones, reasonably stable se- curity prices would be better for the banker and the public — although per- haps not for the broker or the specu- lator — than prices alternately rising to abnormal heights and then falling to abnormal depths; the laboring man, the business man, and the banker would be much better off if labor were continually employed at prac- tically full time on normal wages than they are with alternating periods of labor scarcity and abnormally high waces with their accompaniments of labor inefflciency and health-destroy- ing overtime, on the one hand, and, on the other hand, with periods of ttnemployment. low wages, idle capital, and all their accompanying hard- ahipti. The committee on waste ap- pointed last January by Herbert Hoover as president of the Federated American Engineering Societies in its recently published preliminary report aays: "The largest area of waste lies in the periods of slack production and unemployment, due to the ebb and flow of economic tides between |>oomB and slumps." What Can Bankers Do? Even If we could realize the Utopia of eliminating all the ups and downs of the business cycle we would still be experiencing all the changes incident to a progressive economic order, and business would still be subject to enough uncertainty to try the metal of our best business brains. The curve of business progress (except in times of war. of pronounced failures in crops, and the like) would be continu- ally advancing — now rapidly, now slowly — but practically always ad- vancing, and we would be through with the "roller coaster" process of reaching new heights only by a series of nei-ve-straining rises and falls. As a practical proposition can any- thing be done by the bankers to flat- ten out somewhat this business cycle curve? The answer, I believe, is: "Yes, considerable can be done, and the results will be cumulative, but the accomplishments at the beginning will at best be small." What should be the line of action? It may be summed up in two words, knowledge and discount- ing. The business cycle thrives on un- certainty. The better it is understood and the more widely diffused is the knowledge concerning it, the less harm- ful will it be. If bankers and business men should come to understand the pronounced character of the cyclical movement of the last three decades as they have been ably described by vari- ous economic writers, if they should do their part toward collecting data and in other ways improving our knowledge of the business cycle, and should keep themselves reasonably well posted as to the approximate position of their respective businesses in the current cycle, all rhis would re- sult in a material flattening out of the cycle curve. Many of the most important phe- nomena of the business cycle are the intimate facts of the banker's daily business, such, for example, as the changinp discount rate, the movement of security prices, the varying quality of cellections, the extent of loans, renewals and the expansion or con- traction of lines of credit. Further- more, the banker's business gives him a large amount of inside in- formation concerning- other kinds of buslnes.s. He receives regular finan- cial statements from his principal cus- tomers, and in other ways, through hig credit department, keeps posted con- cerning the developments, favorable and unfavorable, in those businesses. To protect himself he must ofteii ex- ercise a certain amount of control over the businesses of those to whom he grants substantial lines of credit. Hi» couilsel and advice are usually lis- tened to with respect. To an increas- ing extent the banker has become a paitner in nearly every important business — a silent partner nominally, but not always actually, as many business men have recently found. The banker, therefoie, is in a highly ad- vantageous position for promptly se- curing knowledge of the movements, tute the business cycle, while through his own operations and through his influence on the operations of his cus- tomers, he should be able to exercise a real force by anticipating and dis- counting the prospective movements of the business cycle. Some of the methods by which this may be accom- plished will be considered in to-mor- row s article on this subject. A good illusti-ation of how such a re- sult has been accomplished In a sim- ilar field is given in the accompanying chart, showing the seasonal swings of sterling exchange rates in New York for 1890-1899. 1900, 1908. and for 1909- 1 S; I '.'>, respectively. It will be noted that the fluctuations of the last period are much narrower than those of the first period. This flattening out of the sterling exchange curve was brought about chiefly by an increasing resort to the practice of making forward contracts in exchange and by the increasing ."ale of finance bills so timed as to fall due when our cotton and cereal bills would be thrown oil the market in the largest volume. By this process, the exchange rates in tho summer were prevented from ris- ing so abruptly or to as great heights as they otherwise would have risen, and exchange rates in the fall were prevented from falling so abruptly and to the same extent that they otherwise would have fallen. The normal sea- son;tl swing of exchange rates was not eliminated, but was ironed down, to thf great advantage of our foreign trade. October 25 Bankers' Aid in Stabilizing Business Far-Sighted Men Can Take Action Themselves and Induce Customers to Play Safe When Facts of Business Cycle Predict Depression Coming ' By Edwin M. Kcmmerer, . . i TroteaeoT of Kconomlcs and Finance, Princeton University. The evil effects of the business cycle would be reduced If the public emild anticipate the movements that constitute the normal cycle and discount them. Economic movements that are widely anticipated are thereby either prevented from taking place or mollified in their occurrence. Assume for example, that the evi-* dence at a particular time shows we are several years along on the rising curve of a business cycle, that there iMa bean no substantial liquidation for two or three years, that specula- tive activity is running high on the exchanges, that prices of the more speculative stocks are rising, that bank clearings are large, that reserve ratios at Federal Reserve banks andi conmiercial banks are tending down-* waid, call and short time interest rates and Federal Reserve diarount rates rising, the ratios of bank loan; i to deposits increasing, credit becom Ing more and more extended, an< thai commercial failures for som« titne have been running abnormaJh low showing that little dead wooi has of late been cut out of the busi' ness structure. This, for example, it a substantially correct picture, afr^^l** year 1906, and o£ -the ' ' 1- f 1919. and the early part of 1920. ^ Fundamental crop conditions at sucii a time may or may not be good— it they are pooi, so much the wor^e— but the other conditions . mentioned would be ominous, and partioulaily so If they were occurring as aliove as- sumed at somewhere near the time period when according to past experi- ence, the cycle might be expected to be approaching Its crest. What Wouia Banker Do Under such conditions what should a far-sighted and prudent banker do? The answer is the same as it would be •to the qufMion: What have the few most far-sighted and prudent of our | bankers done under similar conditions j in the past? Broadly tspeaking, he would do a I number of the following things: First of all he would probably try to get his assets in a more liquid condition. He would sell his less gilt-edged secu'j- lies while the .selling was good, and place the proceeds either in the most gilt-edged securities on the market— the kind that ordinarily suffers least | in a period of crisis and that usually alone advances during the early part of the ensuing depression — or he might purchase with the proceeds prime (.oni- mercial paper of short maturities, scattering,' well his risks. He would place a larger proporLion of hia re- •otjrces m the best tomn"»ercia) paper of concerns outside of his own would advise them of the daiigei oi: a:i un- due extension of capital at -sui ii a time, and of the danger of too large an inventory, of too heavy commit- ments in the purcha.se of raw mate- rial.?, and of overextended credits to customers. In n word the banker would himself play safe and would urge his customers to do likewise. He might be premature in his action: If so, he could console himself with the thought that it is better to be safe than to be sorry, that he moved In the right direction, and that the very prematurity of himself and of others who acted like hiai contributed towards stabilizing the situation. ; The pressure of the market is so [much more likely to be exerted on the ' side of undue optimism at such a time that the danger of being too late in making such preparations is greater than that of being too early. It makes for stability moreover — for a lejss widely fluctuating adjustment curve — If bankers and business men will differ to a reasonable extent as to the proper time for adopting such measures, and will therefore have recourse to them at somewhat different points in the rising cycle. The effect of their actions then becomes cumulative. Banker Would Profit The extensive adoption of such a policy on the part of bankers would retard the upward swing of the busi- ness cycle and prevent it from going so far as it otherwise would. It would likewise eliminate the necessity of a corresponding downward swing — in other words, it would tend to iroa down the curve and make for business stability. This would be a social gain, but it would also probably yield a financial profit both to the banker and to the customer who followed his ad- vice. An intelligent discounting of the ing the curve on its upward move- ment ? Broadly speaking, he could reverse the procedure suggested above for the time when the cycle was approaching its crest. The preceding liquidation period ac- companied by a relatively large num- bei* of failures and reorganizations would have cleared the way and made safer a forward movement. With a substantial perioi' of rising prices and I rising interest rates in prospect, both I the banker and the business man could 'wisely make <*ommitments for longer periods than before, greater risks would be justifiable now than at the previous period. The cautious making of capital extensions and improve- ments by the business man would now be sound policy, and the banker, although he should keep his assets! reasonably liquid, would not. need lo stress liquidity as much as he had at the other period. In the making of loans, local industries of the kinds that had been most thoroughly, liqui- dated should be favored, and longer economic and financial future always maturities should be acceptable. The pays. extremely g:it-edged secinity hoIdin".s In the above illu.«»tiat on it was ae „«,,iri „.«ii u i* j ' ^^^ as- could well be melted to a substantial sumed foi- some time, and was apparentlv approaching its crest; the situation would be reveis<»d if the cycle had been a declining one. In buch a case a process of liquidation would have existed for some time, the record of business which, though good, would not be the luxuries from the standpoint of safetv that the previous holdings would now have become. During the upward movement of the business cycle cer- tain kinds of business normally revive quicker than others— commonly these failures would have been ' relatively high, stock exchange ^r i ^.TThl '"^"fu ^^'■^~~^°'"™°"'y ^hese ,■ -^ . . , '^^•cnange ac- are the ones that first experience the tiv.ty comparatively low. with the | dechne. Such industries^Srt"cularlv prices of the mere speculative se- i i'Jt."l*""^ *^*^^" •^"^^^ ^^e the ones that curities riiiiei .stagnant or tending ' '^ downward, and those of the most snould first receive encouragement. Our exact position in the cycle at •i» 1 1 . " ®"^ time can never he known and gilt -edged mvestme.it securities rela- sometime.^ it is impossible to feel cer- .. , , . , ' t-^.a- , -- ^- ,t IB iiijpussiuie lo reel cer- tively high .,.s compared with other i '?'" ^vcn about our approximate posi- -sceuiities. liank clearings would be low and bank reser\e ratios would be lion. The business cycle, moreover, i.s only one of many fundamental forces aiTerting general business. It Is high, but bank funds would be n. crossed^n^ ircros^ed'bT'the'even I rather small demand because of the ■ excessive caution of business men in expanding iheir inisinesse,-? oc in j stocking up wit:i jaw material.";. The j ratio.s of liank loans to deposits v»ouid be low; likewise P'edei-al He- serve rediscounts. The pioverbial hand to mouth p^^llcy woulu be in- creasingly ovicienf in bdsluess. and unemployment would be growing. "Things in genetal' would seem to be headed towaru.s a period of de- pression. Such wa.« the situation in more regularly recurring seasonal cycle. Then again there are the move- ments covering long periods of years tike the wide .swings of the genera! price level and of the interest rato level Always there i.s the uncertain- ty of crops, and always the possibil- ity of war. A new condition like the present after-war situation of PJurope trinporanly may so overshadow the forces of the usual business cvcles a«i to make forecasting and the discount- ing of the future exceptionally difB- cult. By and large, however, and viewed over any considerable period o. year.% the business cycle is suffi- the forepart of 19(i7 and such in ther'^«*'-^' '■^S^"'**'" J" its occurrence and sufficiently marked In its manifesta main has been the situation during the greater pari of 1921. What could the banker do towards check- ing such a decline, cutting off the lower part at least of the trough of the normal business cycle, and start- tions to make possible a fairamoun' of forecasting and discounting, and the banker who seriously and studiousl' makes an attempt to do this shoulil in the long run by so doing brinfc profit to himself and render a valuaUa service to the aemmunity. >-A '^ ■ THK BUSUIESS CYCLE Business Cycle and Everyman's Job One of the moat important documents to come before the recent Presi- dent's Conference on Unemployment held in WcLshington was a report on "Vncmployn: ut and Business Cycles." This report is here published for the first time in the Evbninq Post. Definite recommendations are made for exhaustive investigation into the causes and remedies of periodic business depression. The report follows: The first tasks of the President's *- Unemployment Conference "were to canvass the available figures concern- ing the nilfnbers of men out of work in various parts of the United States, and to consider the best means of mitigating the suffering threatened by the present emergency. Now that these two tasks art) accomplished a third task must be undertalien, a task that looks to the future rather than rhe present, to prevention rather than cure. While the proportion of wage and salary earners now out of work is probably Bouiewhat larger than at any previous time in our business his- tory, the present emergency is not without precedent. A similar situation prevailed in the winter of 1914-15, in 1908, and in 1894. to go no further back. Four times in a single genera- tion the numbers of the unemployed In the United States have been count- ed by millions and the idle '^apltal of the country has been counted by bil- lions of dollars. If the future is like the past, similar periods of misery and financial loss will recui- from time to time. The work of the Unemployment Conference is not complete until it has provided for a thorough study of the problem whether we are helpless to prevent the periodical recurrence of such times; whether we cannot at least reduce their intensity and duration. The best method of handli , this problem has been carefully considered. Various proposals for preventing or mitigating periods of widespread un- «mp.oyment have been suggested to the conference. To determine what among thear- proposals are practicable, and to devise methods of putting the practicable proposals into effect will take much time and thought. Ob- viously the whole conference cannot operating at a loss must be very large. Unemployment on a vast scale is al- ways a result of business depressioi. The problem of preventing or mitJ- gating unemployment is therefore part of the larger problem of preventing or mitigating alternations of business activity and stagnation. Such alterations have been a promi- nent feature of business experience for a century or more not only in t?»o United States but also in all other countries that have attained a hisjh state of commercial organization. England, Germany, Austria, and France; Belgium, Italy, the Nether- lands, and the Scandinavian coun- tries; Australia, Canada, South Africa, Chile, and the Argentine; in recent years Japan and British India have had more or less regular cycles of prosperity, crises, depression, and re- vival like the United States. The reverberations of these disturbances in the chief Powers have been felt even by the countries in a less ad- vanced stage of economic develop- ment. The "business cycle" is a world phenomenon. It is not to be treated as a specifically American problem or as one of passing interest. These international aspects of the problem have an important bearing on all proposals for treatment. Anything that we can do now or later towards mitigating business depression within our own borders will prove advan- tageous to all the countries from which we buy or to which we sell or lend. And conversely, the dlflSculties confronting American business will be sensibly lessened by the recovery from depression of any of the coun- tries with which we have Important dealings. Control Not Impossible The world-wide scope and the long succession of business crises do not prove that the problem of controllinji: spend months -n making the neces- , the business cycle is a hopeless one iry investigations. Instead it au thorized the chairman to appoint a committee to see this work done. Unemployment as Result of De- pression An the proposals for preventing the recurrence or mltlgratlng the severity of future periods of unemployment recognized that the problem is one in which the interests of both "capital" and "labor" are Involved, and involved without clashing. The vast majority of the unemployed were recently on the jyayroUs of private business en- terprises. These men lost their jobs because their employers were losing money. Over 15,000 business enter- prises have been forced into bank- ruptcy since the present period of de- On the contrary, this h story, when examined in detail, prove.s that the problem can be solved, a- least in part. For the leading business nations have made incontestable progress towards diminishing the violence of business crises-. Each step In this di- rection has re ulted from a wise use of lessons drawn ■ from past experi- ence. The creation of the Federal Reserve System is a notable example of American achievertient in this field. That measure prevented the crisis of 1920 from defreneratine: into panic. Having devised a method of mitigat- ing the severity of crises we can w;th good prospects of success turn our constructive efforts to the further problem of mitigating the severity of depressions. The time to act Is before a crisis v>f"^ become Inevitable, pi-eselon began, and the number now The business cyclj' la marked by peak peiiods of boom between valleys of depression and unemployment. The peak periods of boom are times of speculation, over-expansion, extrava- gance In living, relaxation in etfort. wasteful expenditure in Industry and commerce, with consequent destruc- tion of capital. The valleys are mark- ed by business stagnation, unemploy- ment, and suffering. Both of these extremca^are vicious, and tne vices ot the one beget the vices of the other. It is tile wastes, the misca'ctilations, and the maladjustments grown ram- pant dxiiing booms that make inevita- ble the painful process of liquidation. The most hopeful way to «^heck the losses and misery of depression is therefore to check the feverish ex- tremes of "prosperity." The b^'st time to act is at a fairly early stage la the growth of the boom. What Can Be Controlled In any analysis of our pmductlva processes we can make a broad dis- tinction between our additions to naUonal plant and equipment, sucli as houses, railroads, manufacture*, and tools on one hand, and the con- sumable goods which we produce on the other. At the present time we increase our activities in both of these directions at the same time and in their competition with each other we produce our booms. The ebb and flow in the demanil tor consumable goods may not ba subpject to direct control; but on the other hand, it should be possible in some measure to control i),e expan- sion of the national plant and equip- ment. If all branches of our public works and the construction work of our public utilities— the railwaya, the telephones, etc. — could systematically tut aside financial reserves lo be pro- vided in times of prosperity for the deliberate purpose of improvement and expansion in times of depres- sions, we would not only gieatly de- crease ihe dejth of depression, but we would at the same time diminish the height of booms. We would in tact abolish acute unemployment and wasteful extravagance. For a rough calculation Indicates that if we main- tained a re.-erve of but 100 per cent of our average annual construction for this purnof.' we could almost Iron out the fluctuations in employment Nor is this plan financially Imprao- ticable. Under it our plant and equip- ment would bi built in tlmen «f lower costs than is now the case, when the contractor competes with consumable pood in overbidding for both material and labor. The subject is one of the most pro- found national importance, and is at least one direction in which a balance wheel could be erected that would tend to maintain an even level of employ- ment and business The action of the States of Pennsylvania and Cali- fornia In making a provision for the control of public works to this end Is one of the most interesting and important economic experiments in the country. DaU Needed to Direct Control In order to guide such a policy tt I THE BUSINESS CYCLE ^-' ^4 \ \ \ ts > 17 i« fundamental that an accurate statis- tical service be organized for deter- mining the volume of production of stocks and consumption of commodi- ties, and the volume of construction in progre^ thrgugh the nation, and an accurate return of the actual and not theoretical unemployment. These •ervices are now partially carried on in the different Government depart- ments. Such statistical service would in it- self contribute to minimizing the peaks and valleys in the economic curve. The same warnings that would •nable intelligent action on the part of public authoiities and those who control large enterprises in guidance as to the periods in which construc- tion should be deferred or should be initiated would also serve as a warn- ing to the commercial public and would tend in themselves to effect the ends desired. As a first step in such a programme, statistical service ade- quate to this purpose should be im- mediately authorized and carried out by the Federal Government. The committee charged with the fol- lowing up of the work of the unem- ployment conference will have to con- sider other plans that have been put before the conference with the in- dorsement of various bodies, such, for example, as the "Hubcr Unemploy- ment Prevention bill" now pending in the Wisconsin Legislature, the schemes for insuring a minimum re- turn to lean years to botJi capital and labor with which certain corporations are experimenting, and the out-of- work benefits of trade unions. Vari- ous reforms of the banking and mone- tary systems nlso have warm advo- cates — centralized banking, stabilizing the dollar, raising discount rates earlier or more rapidly in periods of pro<:perity. and the like. All these topics and perhaps others unknown to the conference might be taken up by the propospd Committee on the Prevention of Unemployment or left alone, according as the com- mittee saw or did not see a prospect of rendering service by an investiga> tion. Certainly the committee should not be burdened with the duty of In- vestigating every proposal that haa been or may be made for the accom- plishment of its object. On the con- trary, the committee should have power to limit its investigations strictly to those plans whose merit and defects it is able to determine with the means in hand. A report from such a commltte* prepared after due deliberation, la necessary to follow out and render effective the emergency work of tha President's Unemployment Confer- ence. For no constructive programme of preventing the recurrence of pe- riods of widespread unemployment la likely to succeed unless it is based up- on thorough investigation of the un- derlying facts and a matured judgment on the merits and defects of the pro- posals submitted to the conference. October 26 Lessons Learned; Business Cycle Guides One Firm Through Crisis American Radiator Co. Successfully Lessens Trade Depressions By Clarence M. Woollcy PrwMtat of tb« American Radiator Company A knowledge of the principles and theory of the business cycle extend- ing over a period of nearly thirty years and a practical application oT the theorj' to the affairs of the Ameri- can Radiator Company for more than twenty years have convinced me that there could be no greater boon to the American business man and the Amer- ican business community than a wide diffusion of knowledge of the fact oj the business cycle and a general ap- plication of that knowledge to busi- ness management. During the last twenty years tb*. American Radiator Company hi> weathered several periods of busin^-ss d«pi . t»^'9M & ton, when it etood when GofTiniment control ended. After the Ckrvarmnent ceased price control, pig iron went down to $26.75, and then up Again until it stood at the general (•▼•I et $46 a ton in July. 1920. We knew of Instances in which bonuses brought the price up to $56 a ton, but oar charts showed the general level of Sit & ton. At the same time we saw interest rates at 8^, 9, and 10 per oent, and prices generally greatly in- Once more our directors decided that depression was in sight. Once more we liquidated our inventories. paid omr debts, cut down production. and got ready for the storm. We had come by experience which brought anderstandlng to place, implicit re- )isttce upon our ability accurately tc ferecaat the logical trend, of finance and bualneae by skilful inter pr eta - tloaa of our economic charts. The busfness cycle was no longer a theory. It became for us a veritable compass to guide us through the gathering mists of depression. Now we come to 1921. At the be- ginning of this year our charts showed -lis a large Increase in the number of building permits issued. Oetailed statistics showed that the vast ma- jority of those permits was for small heuMS. Other charts showed the prices of bonding materials declining. At the same time interest rates were coming down. We decided that it was to be a moderately prosperous year foi- u.s. it wae time for us to expand. We made a satisfactory adjustment of wages with our workmen, opened up our factories. Increased production, made a Ug reduction in selling prices, and while the first six months were be- low normal, the last half will be the largest of record. Our order books are now crowded with unfllled orders, giv. iBg the necessary l>ack log for uninter- rupted productk)n throughout the winter. These example* all show the advan- tage not only ^of understanding, but aprwying practically the prmciplea of the business cycle. There are many business men who say the business cycle is an interesting theory, but falls in the effort of practical applica- tion. The experience of this company has proved that the principles of the business cycle can be applied to the practical management of business. Under our old banking conditions it was possible to forecast a coming panic or deprf«sion from three to four months in advance, while under the Federal Reserve system such changes can be forecast from six to eight months In advance. The revival can also be foreseen, for your charts keep you accurately informed of the trend of economic movements. Eugene Meyer said the other day in Washington: "Pessimism always fol- lows, it does not precede, a panic." The condition ought to he just the re- verse. The time for pessimism Ls just before the peak, when pvices are In- flated and money i. but the price of pig iron in connection with the interest rates. Another business would need a dif- ferent variety of statistical Informa- tion, but all bu?!nesa must follow tht Interest raU-'». The price of money has a div»ci bearing at all times on the »>uim^ss situation. Wlien Iiiteresc rate..^ get too high the flag is up sig- nalling a depression under was'. A I the present moment, in my opinion, the business revival has starred, althougli deflation has not quite tun its course. Money is too high for developmental purposes. In- come taxes, especially in the upper brackets, tend to sap the sources of normal growth. Railro«d rates are too high. Transportation costs are decisive price factors in most of the key industries. Progress thus far is largely due to concession. Some con- tributions to the common purpose are yet to be made by labor as well as by t apital, before genersl business currents reach a normal flow in the revival now in the initial stage of de\ciopment. Wrong Ideas Must Be Liquidated By M. C. Rorly ▼tee-PrandMit Bell Telephone Seruriries Compaoy No one who surveys the events of the last fifteen years can question the importance of developing all possible antidotes and correctives for business depression. However, the antidote that perhaps is needed most of all :s an antidote for over-optimism with respect to what may be done. It may be comparatively easy to aaeemble the facts and principles which will enable Intelligent executives and 'business organizations to discount. and therefore to minimize for them- selTes. the effects of periods of busi- QSM Inflation and depression. To some extent this gradual education of individual business organizations may react on business as a whole. But thoae who hope that eJl business or- ganizations and all the people can quickly be brought to a realization of the fixings that must be done and left undone in order to avoid extreme vaj'i- ations in business activity are \ery surel.v doomed to disappointment If bu,''iness depressions had only vo bring about liquidations of business conditions the problem would be sim- ple. The groat difficulty lies in rhe tact thar business depressi'Ji's are ver.v frequently calleil upon lo liqindatr idean — and ideas in ilie form of eco- nomic fallacies are most refractory ones and yield with extreme reluc- tance to the smeltina- of fact? and experience. X busines.s depression is fundament- ally an illness brought about by a combination of business excesses and economic diseases. It very rarely is the result of » single cause. The immediate crisis ordinarily results from over-expansion, but when the proce-ss of re.-overy sets in it \^ usu- ally found tfiat there are numerous ivinks and defects in the business and f^conomic structure that must be cleared up befo e convalescence can be complete. Studies of the business cycle have to-day progressed to a point where tlieif is substantial agreement as to maii.v of the principles that must govern in maintaining business on a reasonably even keel and in hasten- ing I ccovery whenever an unavoidable j crisis comes. The difficulty is net in I pre8( ribing adequate remedies, but in ' prf-\ai]ing upon the patient to take the medicine. The first i-equirement indicated by these studies is that the txpansion of bank loans shall be checked at the point where proper business activity begins to run wild into inflation. A sound application of the principles on whi^ h the Federal Reserve system is based requires that this check shall be applied through increases in infeiest rates, it must always b« possible to borrow on proper securit-v I at a price, but this price must become ; high to all borrowers alike when the j point of inflation is approached. Our present banking system is abso- lutely free to operate as a banking syetem in the hands of trained bank 1 . ^ . t ' ers and in such hands we have rea- sonable assurance that any renewed tendency toward over-inflation in the next two or three years will be checked l)efore .serious harm is done. It is to be hoped that the new bank- ing system has already acquired suffi- cient stability and public confidence to withstand the pressure of politics and demand for the dispensing of special favors to those interests which for the time being have political power. Will even the business men, who should insist on high rediscount rates when inflation approaches, welcome such rates when they are actually im- posed? Will there not be charges from farmer and merchant alike that the bankers are falsely prophesying the approach of a crisis in order to have an excuse for increasing their own profits? Effect of Abnormal Factors Another thing indicated by studies of the business cycle is that abnor- malities in the prices of commodities and services, which may not seem of great importance during a period of inflation, may nevertheless interfere very seriously withwthe process of re- covery after a crisis. At th.e present time there is general belief that busi- ness might be greatly stimulated if building costs and freight rates could be brought more nearly into line with the general price level. However, in the case of the building trades there is evidence of a variety of monopolies and semi-monopolies in building sup- plies and materials; while both build- ing costs and railroad freights are af- fected by the unwillingness of power- ful labor unions to surrender recent increases in real wages. It is not necessary to express an opinion as to the merits of either controversy. The essential point is that the pessimistic student of the Ijusiness cycle seizes upon these facts as reasons for ills belief that control over business depression will be slow ly and painfully established. He claims that a sustained normal busi- ness activity, brought about throug.'i an intelligent control of bank credits, would tend to invite the building up of dangerous business and labor monopolies. He contends that periodic business depressions afford the only safeguard against such business ossi- fication, and that occasional depres- sion is preferable to permanent ossi- fication. Work for the Fcrseeing Optiniist When it comes to relief measures the pessimist also has his fling. He points with pessimistic glee to the present attempt to maintain exports and secure payment of foreign obliga- tions to this country, while at tbo same time blocking imports by ex- treme advances in tariffs. He is not hostile to emergency relief work, but he asks whether there will ever be a j general public acceptance of the eco- I nomic necessity for requiring a ftill day's service on such relief work for something distinctly less than the market wage. The writer is himself an optimist, rather than a pessimist, regarding the possibility of securing a more evenly sustained business and industrial activity. He has infinite faith in the. ability of the mass of the American people to comprehend fundamental economic truths and in their willing- ness to submit themselves to the re- straints that will be necessary If future business depressions are to be minimized. However, the working out of the solution will not lie with either the pessimist or tlie enthusiast of a day or a year. It is a problem for the farseeing, patient, and public-spirited optimist who can be satisfied to seek his results in the next generation If they cannot be obtained in this. This does not mean that all progress will be postponed to the next generation. Much will be gained if the present de- pression brings home to a substantial number of business men the real nature of the business cycle and the importance of advance preparation the inevitable swings. Ocloher 27 Labor Experiences "The Cycle" By Leo Wolman- tf' Chief ol rtesearch Department, Amalgamated Clothing: Workers of America. Workers know no more about the facts of depression and the business eycle than does the average business man. What they think and feel aboat a depression is the result of their own personal and immediate experience with it. They know it as a period in which they are out of work and are thrown upon their own slender resources. They know it as a time wh:in their wages are slashed, so that even when they do work they earn less than they did before. They see millions of their fellows, yesterday pros- perous, to-day on the verge of distress and misery. Attempts to mitigate their suffering they regard as weak, half-hearted and largely ineffectual. Out of a set of experiences and observations of this kind grow whatever attitudes towards depressions workers may have. Their reactions are moreover not*- the product of hallucinations, but usu- ally of the facts as they see them. Every one familiar with the history of the present depression will remem- ber how it was ushered in with vague threats of bread lines and union busting campaigns that would soon teach labor its proper place in the world, unemployment was in many quarters ever hailed as a godsend, since it would be the means of re- ducing labor to impotence. Whether deliberate or not, open shop move- ments found their points of departure and took on fresh impetus not in the periods of business activity, but dur- ing the depression. The agitations to protect the rights of the non-union workers against the aggressions of periods of business lull and inactivity. In fact, almost every type of activity, designed to weaken the position of either organized groups of workers or of individual workingmen becomes strong and successful only when bus^i- ness is bad and people are out of work. Labor's Condition Follows the Cycle A chart based on the statistics of trade union membership will show that the rise and fall of trade union strength Is in almost complete agree- ment with changes in the business cycle. In the 90's, in 1907-08, in 1914, and again in 1920-31 the membership of American trade unions has dropped workers agamsi ine aggressions oi or American iraue unioiia nas uxopptru the organized are, as a matter of his- in response to changes in business tory, phenomena largely peculiar to 1 conditions. The drop has never, to be sure, been as great as the rise, btlt it has always been substantial. It would be no exaggeration to estimate the fall in trade union membership since the beginning of the present depression at a figure approaching 1.000,000 members. Some of this drop is no doubt due to such causes as the inability of people to pay dues or to their leaving the Industry. But most of it comes, as a study of the figures clearly shows, in those places where business men have deliberately en- gaged in the task of destroying unions. These facts every workman knows, if not in the large, at least ia his own shop or in his own industry. Wherever he knows them, much haa been accomplished thereby to pre- vent him from being a sweet and rea- sonable person, ready to discuss wage adjustment and liquidation in a ra^ tionai and impersonal manner. Much the same kind of factiB com- bine to determine the position of the worker toward the adjustment of wages in periods of falling prices. Im spite of the spectacular rise in prices and wages after 1916 and the resist- ance of organized and unorganized workers to wage reductions during the last two years, the probability is that the great mass of working men and women in the country have lost heavily in the process of readjustment. The loss, moreover, is not a temporary one, limited to the period of actual de- pression when profits are low and the volume of business is falling, but It be- comes permanent and is extended to the period of business activity which A THE BUSINESS CYOr.E alwaya follow* the deprcMion. A re- Mnt and highly authoritative «tudy ¥y Paul Douslas and Frances Lam- bei'son of the course of wages in this country from 1S90 to iJlg shows that the employees in a group of basic and representative industries were heavy leaers in this whole period. Speclflcally these investigators find that "the pur- ehasinir power of an hour's wages was 20.7 per cent less in 191 S than it had been during the years 1890-99, and that the purchasing power of full-time weekly earnings was 29.6 per cent lees than durins this period." For the two yeara following 1918, wages, of course, rose very rapidly. But people are prone to forget that these same two years were characterized by one of the moat Apeciacular price-rises in the Ms. toi-y of the country. While the full data are not available an examination •f sampler here ana there leads to the conclusion that the relative status of workei's was little better at the peak of prices in 1929 than ic nad been in 1918. These are the conclusions drawn, moreovei*. not from abstract speculation, but from fhe scientific analysis of the available facts. With the collapse of business in 1920 came the wave of wage adjust- ment. At first progress was slow. Attempts to reduce wages met wjth vigorous lesiatance which was fre- quently successful. Public announce- ments by business leaders in many In dustries defended proposed wage re- diictions by pointing to the fall in the cost of iivingr and by indicating their intention of maintaining a parity be- tween the wage level and the purchas- ing power of the dollar. Soon, how- ever, the situation changed. The volume of unemployment grew. The position of ti'ade unions became weaker. The co.«".t of living as a standard of adjustment was discarded. And industry after industry, either directly or indirectly, put into eCCect wage reductions out of all proportion to any drop in the cost of living. The effects of this practice are clear. In the first place, the weak and unorgan- ized workers are thrown back on a standard of living even below that which they enjoyed before the war. Whereas the strong and organized groups, obeerving the experience of the others, are stiffening thei- resist- ance and are conceding wag* reduc- tions only where reduction Is shown to be itiiavoidable. Aside from the merits, then, ef particular demands for wage adjust- ments, the facts seem to point to thf use of (he depre.ssion by business men for pin poses other than those of legiti- mate liiisincss i-eadjustment, As Ion? as this continues to be the case, the country may look forward to the repe- tition of those gi-eat industrial battles which make industrial depressions even more disastrous than they would otherwise he. That this need not be the case is shown by the expeilcnce in many industries in which self-respect- ing employers work openly and above board and on even terms with self- respecting employees. In such case«. too, theie have been difficultiea. But the instances of successful, effective, and peaceful adjustment in these dilfl- cult times are frequent enough f» recommend this method to those em- ployers who have tried the cithers and have found thorn wanting. October 28 Business at Crest and Trough H. S. Dennison, president of the Dennison Manufacturing Company, •ketched with a pencil the wave and the trough of a typical business cycle and dotted in the lines representing both what would be desirable and whft would be practically possible in the modification of the extremes of in- flation and depression if business had the knowledge and the foresight to adopt the proper measures. "Whether or not it would be desirable," he said, "to flatten out th3 line of business activity to the straight line of growth— -I am inclined to think it would be undesirable to do so — it certainly is impossible to do It. However that may be, it is not the wave itself but the breaking crest of the wave that does the damage. We should therefore focus our attention upon the crest and try to discover and apply measures which we may rea- aonably expect to modify it. "The crest of the wave is due to* the widespread belief in the «ontin- uance of the rate of expansion of the counti'y and its business, which i» too gTeat to be maintained and as.'simi- lated. Over-estimates in this regaid, ever-eatimates in the individual en- terprise of requirements and of futute pricee, lead to over-exienaion of plant, •ver-pui'chases of raw materials an 1 merch^ttlise : increasing si/e and ir- '.ison Implied, ■"what we have ilon* ourselves: what hplpert \o put our business ill a position lo weather the storm when it canu--. it ha.s been ley 'I over a i onsiderabif pei iod an-i it hf. • i.«iified iisieif in our c.\perien«e. "Our pi-actice follow.'* a policy affect- ing our conduct of production and plant -developm»'nl. oui use of our own ♦tBciercv in labor force and in methods j credit and its e.\ten.siun lo our custo- •f management, and over-st.ainin,i mers. our pu.chase of raw ma. aria's Of credit resources. J'hese effects ap- | and merchandise, our advertising ply to commerce, Indus ry, iransporta- I -The policy of ot.r purcha.at,€s Wr; ma.v lo.se bv holdiii.s lo the policy ot smaller ctuan- (itie^ lor uuniediate needs. Kut wv have ncvpi- been able to predict ejcac^ I.) ices ;iud our e.vperit nee i« that we come oMt better in the lone run bv oui- more conservative policy than b\ bnyinR heavily up to soim' 'ncsLti price* ;ii wnich we c.4n only gui'ss. ■Naturally, with regard to the uem VI I ^ tributed promptly and frequently, re- garding: the things that both govern and exhibit the currents at work to bring about and accelerate or retard the fluctuations of the business cycle." "What sort of information would you have gathered and distributed?" 'The most important thing, it seems to me. Is to have well presented and widely distributed by some agency in which we could have absolute confi- dence thoee facts which would help towards correct estimates of the course of sales and prices. These would be at least the followinjr: Statistics of inventories and foods on order. Statletica of production with the ratio to production capacity. Statistics of construction be- gun and under way. Week:y earnings and hours by trades and establishments with the ratio to capacity. Employment statistics. StaOstice of cost fundamentals. Factors affecting probable de- mand for or consumption of specific articles. "Remenber that while consumption, especially in a country so large as ours, and with a constantly rising standard of living, ie capable of In- definite ittcrcaac, the rate of increase cannot be indefinitely speeded up. Nor can expansion either exactly foresee or exactly match that rate. When- ever expansion overtakes or materially exceeds that rate, it strains the whole structure, and we are due for a tumble. Taking the cotintry at large, and having in mind the 'ultimate con- sumer,* on the \ip wave we are stock- ing up. On the down wave we stop producin.^ and arc drawing on stock. That'* the story, every time." Here Mr. Dennison reverted lo hi.s sketch of the business cycle. Measures at Peak and Trough *'Xow. take this sketch, and note tii"? points at which 1 have put arrows — •A" and 'B.' It ia to the froth of speculation at the top of up-wave and to the gloom of paralyzing fear at the bottom of the trough, that follows the bieak. that we should de- vote our efforts of education and co- operation. The arrow 'A' points to the place where the information that I have outlined as desirable would help us to put on brakes. Business now will not listen to warnings ut- tered at 'A'— things are too good, the boom will go on forever. So the next best thing is to apply the same kind of Information, at the point where the other arrow points to 'B,' when we are buried in gloom, and business feels as if the bottom had fallen out of creation. Then is the time to have correct estlnutes of the courae ef sales and prices, and on the baaia of such estimates apply judicious expan- sion of credit and easing: of intereat rates with preferential loans for pro- ductive purposes, for tbe undertakinar of withheld projects. Then, when business is in a teachable frame of mind, after bitter experience, is prob- ably the only time to learn, not only what to do at 'B,' but what to do next time at 'A-* "But we can't do anything effective in the way of cooperative action at either point without reliable and con- tinuous information, and underlyingr that the intelligence that cornea fro"T an understanding of the fact of, anct the factors In, the business cycla." H. S. DENNISON'S SKETCH Representing a typical buainess cycle. "A" is the point where measures ought to be taken to prevent the extreme of inflation. "B" is the point where wise and well-informed foresight might prevent the extreme of de- pression and expedite the upward swing. Ochber 29 A Business Policy For To-day By Mavk W. Cresap Of Han. SL-liaftner & M»\% The armistice of November 11, 1918. ushered in a period of gieai uncer- tainty in business generally, which the clothing business shared to a very marked degree. The high prices produced by the diversion of men and materials to the war and by other abnormalities were always referred to as "war prices," and it seemed only natural that the end of the war would bring with it the end of "war prices." This was the situation that faced merchants in the fall of 1918. and they met it in two ways: Some stopped buying and waited for the drop in prices; some kept on with the ordinary I processes of ilieir business and were i'l a position to profit by the enormous demands which 19i;j brougiit with it. Of the two cias.ses, those who waited en the expected fail in prices were diverting theii attention from their main business — the sellina of clothing — in the hope of profiting by specula- tive changes in the market. The others concentrated their attention on stiling. turned their stock rapidly, .ind rebought. The yeai 1919 brought with it a further great price inflation, conse- quent upon the extraordinaiy demand ci rated by the return to civilian life of 4.000 000 demobilized soldiers, and by the more rapid rise of wages than of prices, at least in many quarters. This continued into the early months of 1920. On the day after Easter, however, i which fell on April 4, 1920, there came ] throughout the country a conspicuous ' furtailment of buying. The price Umit had been reached and the almost simultaneous cessation of buying which took place in every corner of the country presented an interesting phenomenon, partly economic, partly psychological, and not wholly ex- plicable. Tremendous Investment at Stake For a period of a month or six weeiis there was little activity, pend- ing development. The retailer had in his store goods purchased for the spring of 1920, and he had on order goods purchased for the fall of 1920. These two seasons represented the highest prices ever known in the clothing industry, and the merchant had a trcmendoua Investment at atake. The public refused to buy at theae prices.- Xo store can go along tf^thout business — its expenses would eat It up >> i » 92 THE BUSINESS CYCLE —and this is doubly true where the commodity sold is perishable or semi- perishable. Thus price-cutting began in an effort to stimulate business. It became general in May and June and continued almost without interruption for about a year. In many cases goods were sold at far less than their re- placement value at the time, but the only thing that could be done was to ■ell and then attempt to deflate the Vrlce of raw materials and the cost of production later. By the end of that year the mer- chandise bought at peak prices had been sold at one price or another, the price level had changed, dropping ap- proximately 34 per cent, and the whole Situation had become fairly stabilized at a price range of about 1.79 com- pared to the pre-war period. Some manufacturers and merchants went through the period of deflation with flying colors. Here again the same difference in viewpoint which was exhibited after the armistice was apparent. The wise merchant kept on selling — he did not hold his goods because replacement values were higher than the prices at which he * could sell his holdings. He moved his merchandise at what prices he could, and kept up his volume; and as a result he sold on the drop instead of at the very bottom and thus mini- mized his loss; in addition, he avoided an increased pearcentage of expense by avoiding a dwindling volume. Those who took their loss quickly are now on a comfortable basis; the others suffered severely in some cases, losing as much in one year as had been made in the five preceding years. It is, on the whole, surprising that the mortality has not been greater, but altogether it can be said that the clothing business liquidated in a highly creditable manner. Protected Against Losses During the period of inflation we made it our rule not to engage in any expansion without first carefully con- sidering the possible effect of a sudden contraction of business. This pro- tected us against too great factory ex- pansion and fixed charges which might later prove excessive. We de- pended on quick turnover for keeping down our inventories, with the result that, although we did about twice as much business in 1920 as in 1919, we had lesg than half as much inventory after depreciation at the end of 1920. It was our opinion that high-priced goods owned by merchants should not be carried out in stock a moment longer than necessar- We liquidated our own 5tock on tiiat ba^is and we advised every customer on our books to do the same. We were not suc- cessful in getting them all to do it, but we succeeded nearly enough, so that our credit losses for 1921 will be negligible. Our policy for 1921, and that in- cludes the policy we emphatically in-' dorsed to our customers, was, after dis- posing of our old goods and getting v i the new price level, to meet the pubLc demand for lower prices by operatinfe," on the closest possible basis and to examine the overhead carefully from month to month in the light of chang- ing conditions in order that it might quickly be adapted to fluctuations in volume. Many merchants continued to lose money in the early months of 1921. We urged them to get their business as quickly as possible on a paying basis and stop the depletion of capital. The reports from all quarters of the United States indicate that there is t very general movement in that direc- tion. Lessons From Recent Experiences The lessons from the experiences of the critical years of 1919, 1920, and 1921, as we see them, are: (1) That the modern organization of business, Tvith its large investment in stock and heavy expenses, makes it necessary to keep business going; the alternative is an expense and deprecia- tion that is ruinous. If business is kept going and the turnover be rapid, the losses on the inventories on hand at any time will (be small relative to th... continuous benefits accruing. A retail merchant's function is that of consumer's agent. His job is to buy, to sell his goods rapidly, ajid not to U-y to play the game of market speculator. If he waits for the market to go down before buying he loees business; if he Waits for the market to recover before selling, he loses business, he risks a still larger loss— and his expenses go on. The merchant's safety lies in the quick turnover and rapid selling. If he factes a loss the thing to do is to take it. and take it quickly. In this way he lessens his depreciation, lowers his overhead, and reduces the cost of distHbution. (2) That every merchant, manufact- urer, or retailer should know about how much business he can successfully ao on his capital and never permit himself to go beyond that limit. Any banker can give abundant evidence of the number of businosses which . are now suffering embarrasisment be- cause they did not have suffltlent capi- tal ti> finance themselves safely. They relied on a continuance of the easy times in which they were launched, or expanded, and the slowing up of busi- ness quickly made it apparent that they liad stretched their capital be- yond t he safety point. If a merchant nnds his volume exceeding what his capital can properly handle he should do one of two things— limit the volume or increase the capital. (3) That a fluctuating volume and a risinK overhead are a verv treacher- ous combination, and that the statUti- cal end of every business should be so organized as to reflect immediatelv true conditions and indicate trends (4) That the average American biifi- ness man is much more honorable and tenacious of life than he was twenty- five years ago, and, considering the severity of the deflation, there were comparatively few attempts to com- promise indebtedness, and an «x fltlures "™**^'* number of dlshoneet October 31 Running a Big Retail Store as Prices Decline A brilliant example of the need for clear business thinking on the part of those who have responsibility for the success or failure of big business enterprises is shown by the recent experience of one of the largest of New York's department stores. Inci- dentally, the same story shows a sad proportion of business executives who do realize that there is a principle animating business progress. In this case it is one in seventy. Before starting the story it might be well to point out that reliable statistics show that in volume tht? movement of goods over retail counters of the country has been larger to date in 1921 than for the same period in 1920. These statistics taken by them- selves are likely to be misleading, for they would seem to indicate that the retail trade has been prosperou tlirough the depression which has af- fected every other line. They must be read in connection with other fig- ures, showing that in value the move- ment has been considerably less. The actual situation was that the retail trade of the country came up to 1920 with huge inventories of high- priced goods and was faced by a fall- ing market. In other words, tor all the statlctlps indicating a huge re. tail trade in '1921 the retail business this >'. ar has been in just as parlous a state as «ny other line. How This Man Works Now for the story. The chief per- son concerned is the managing head of the store. It is his own modftst wish that his name be n\t dIsclo«?d,' On a* upper floor of theV store he has a large ofHce facing a buey street. There is an expensive carpet on the floor of the office and there are two expensive desks and sav- tive occupies the office in solitary state era] expensive chairs. The exeoui 1 THE BUSINESS CYCLE 23 \^ m, f k r f' He smokes pretty constantly and spends a good deal of time walking around the room chewing the end of a cigar. Some more of his time is spent beforo one of the windows, his feet spiead apart, his hands under his coat tails, looking out on the busy street. Once a week there is a meet- ing of the department executives and buyers, at which the managing head listens to reports and opinions and re- ceives advice — also gives advice. At other times the managing head visits thie various departments and has little conversations with their heads. But the impression one receives is that most of his time is spent wearing out the expensive carpet in his large of- fice. "Your business ha.s come thi-ough this depression in such splendid shape," I said, "that it would be extremely interesting to know how you have done it." "Is the depression over?" the man- ager asked. "Well, what do you think?" "I think," he replied, "that the pros- pects are for the upturn. We are doing an excellent seasonal business now, and I look for business to con- tinue good through the winter and get better as we approach the spring." "We seem to agree on that. Now, will you tell me what it was that made you think a depression was coming and what steps you took to meet it?" Foresight in 1919 The managtr assumed a thoughtful expression. "It was back a-s Car ns l'U9.' he said, "thai I decided piicc? had to come down. They wore awa> too high, you know, following tlie war-lime boom. And when prices go up they have to «.omc down. That i.'-. if they go too far up. "Lote of people talk about normal prices and normal business, meaning the bu.sines"s iind pri' c.« of 1914. But you've got to remember that there i-s a normal increase of busines.'-- and rise in prices. I ligure the business in- rrease at aliuut 10 per cent a \ear with us. which bring us at this time up to about CO or 70 per icnt above our 1914 level, and the rise in price* that would have taken place since 1914, leaving the war out of considera- tion, at about 25 per cent. "So, I figured our 1919 business on that basis, and it was evident that prices were inflated and lousiness was inflated. We had to figure on lower prices and a falling off in business. In addition, there were conditions in Europe to be taken into consideration. Europe was in a bad wav and was going to be worse. We couldn't es- cape the reaction from European con- ditions. That would bring our prices still lower and make our business still worse. "There wasn't any way to say ex- actly when we would be hit, but that we would be hit was as certain as death and taxes. But I couldn't con- vince iny department executives and buyers of It. We have about seventy of them in this establishment and they all thought me getting too old and conservative. There wasn't one of them I could convince I was right. j "They said the war had Put punch and pep into business and boosted everything up to higher levels, where it was going to stay. They said the boom was going to last for years, there was no end in sight. And the salesmen who came in here were al- ways boosting that game. They were all the time warning our buyers that they couldn't promise to fill or- deis at any specified time. '• "Order all you want," they would .say. 'and then double it. You won't get more than half what you order, any way. much or little. We're stacked up .so far ahead with orders that we never pretend to fill more than 50 per cent of an order.' "Then our buyers would tell me about it and say, 'Look at that. The country never .saw such a boom. You cant go wrong.' "liut We kept out uiders down, just the same, and 1 noticed that they were alway.s filled to about 110 per cent. It didn't look so sood to me. But then, I'm olii and con.sorv.itive, 3nd I cotildn't make our buyers sec it. ••Tlioy saw it in the spring of 1920, though. 1 went away for about a month at that time, and when I got back, i found thcs' iiad all i onie /round to my vlow. We .started a campaign of cutting prices, and selling then. lAickily, wo didn't have a big ovcistock. But what we had we put on the tounter.s and took our loss. In a short time we had cleaned out $1,000,000 from our inventories. "We didn't stop buying. We bought right along — but on!y what we need- ed — and kept our stock replenished on a falling market. And we made up in profits on the new goods what we lost on the high'-priced stock and made money on the whole transaction. We are still continuing that policy. "But we couldn't have done it if we had loaded up with a huge high- priced inventory in 1919 and the early part of 1920. I don't look so old and conservative to a lot of these fellow.s now as I did two years ago." "I suppose to make the overhead balance with the falling prices, you had to cut wages and salaries all around?" Did Not Cut Wages "No," he replied. "We haven't rut a penny. I am one of those who be- lieve retail trade wages and salarifs always were too low. We put pay up to meet the increased cost of living during the war and we are going to keep it up. We have met the in- creased overhead in a different way. We have done a lot of scientific work here in the last two or three years and what we are doing is getting in- creased eflSciency. By doing that w«» are keeping up pay. keeping up in- surance, keeping up pensions, and we haven't got any increased over- head. You might put it that we cut the overhead by not having to put on four or five hundred extra em- ployees every little while to take care of the seasonal rush. Increased efficiency among our regular fore? handles the seasonal rush better than a temporary increase in force." "And you think the general out- look is good?'" "I believe in .\merica. I believe In the future of this country. When de- flation i.-; finished — and I think it is about over with now — I believe we aro going to swing into a period of prosperity again. I think it is under way now and \\ c will get back to nor- mal; not the normal of 1914, but 1914 with the natural increase of seven years added. .\nd after we have reached that point we will strike out for the 1920 level. "But you have got to remember that when prices get too high, when busi- ness goes beyond the regular yearly progression, there has got to be de- flation, with falling prices and slack- ening business. Then, when the hot air is let out of the balloon it begins to inflate again." _ ^ ^^ THE BUSINESS CYCLE November L Uncertainty Causes Up-and-Downs of Business Cycle *Torecasts Come True Only When People Do Not Accept Them r — "^ ^ Psychology Rules Securities Markets as It Does Industry A wen-knoum tanking expert in this article points to the particular things which busitiess men should observe in the guidance of their business action. J By John E. Rovensky Vice-President National Bank of Commtice Belief — human psycnology — is the animating: fore© of the business cycle. Men always believe that prices are either going up or going down, and act on their belief. So long as the community believes prices are going higher, business is brisk. Conversely, when the belief prevails that prices- are going to be lower, business is poor. Between these two states of mind, and the periods that they pro- duce, we have usually a "twilight sone" of hesitation — the twilight period at the base of declining prices being usually longer than at the top of an advancing market, when men are apt quickly to change their posi- tion to "get from under. Prof. Kemmerei in his articles in the ttX&aXng Post's business scries ivisely said: "The business cycle thrives on un- certainty." Th* existence of the business cyc'lR has heen recognized as an established eriods of prosperity followed in order by crisis, liquidation, depression, and revival. But to admit the periodical recur- rence of the business cycle is one thing; to attempt to forecast it is quite another. A forecast, if accepted aJ correct by a substantial part of the community, tends to prevent (or ameliorate in proportion to the num- 99 bcr of people who acted xipon it) the happening of the event predicted. "Forecasts True if Not Accepted" In other words, a forecast can only come true to the degree that it is iiot accepted by the people. I deem it im- portant to Doint this out for the reason that occasion.illv atlempts have been made by writers to rpduce the fore- casting of the business cycle to a statistical formula, which may miislead one to believe that such predictions! can be made with tho practical cer- tainty of a weatb.er forecast. If we bear in mind the purely psychological cause of the bu.sincss cycle we .siiall better undc-rytand its vagaries and shnll ajipreciato how ini- por;.=;ible it is to draw a chart or other guide ba.scd on statistics tnat would forecast the movements of the busi- ness cycl? with precision. Reai Value of Warnings The valuo of such gualer is confined, I in my judgment, to pointing out in , boom times to the bu.siness communi". } I the iieights to wliich op! ,.Ksm i;i j carrying it, and thus by dieting the I upward moveme'.t temper tho effects j of the inevitable reaction. Likewise i in period.s of deprei-sion .such guide: i are valuable in brmging about a feci- 1 inp; that the downwaid movement ha.s ' gone f:ir enough and that nttter time., I are ahead. In a wonl, if the busincaa I community were to closely study th I operatioii.; of the bu.sincss cycle the result would be a shortening of its diameter — iho swinj,.; from one ex- I treme to the other would not be as j great as at jires-oat. In a I'topiun coni- I murity peopled by precise thinking • machine.^ devoid of s*ntiincnt the busi# I ncss cycle coulJ not operate. i How can we gau^e Wh'^never the majority oC our people regain confidence in ths future of prices the recovery will be- come more npid. Important obstacles to the establishment of such confi- dence still partly obstruct the way. Among these obstructing factors i.i the uncertai.nty arising in part frorn the unequal rates at which price antj wage adjustments have taken place in the various branches of industry. Th« uncertainty of the European situation also acts powerfully to retard the re-^ turn of conMience. THE BUSINESS CYCLE November 2 } » ^' % ^ <■■ f- ^•> How One Exporter Foresaw Business Decline Abroad r To-day's article in the Evening Post business news series shows the vigilant study of varying con- ditions in every country required for successful handling of trade and credit in war- and peace-time. Theodore T. Malleson Export Manager Royal Typewriter Company (An interview by Fred B. Pitney) "The exporter who doesn't figure In advance on what trade condition i» are likely to be will very soon find himself in a bad hole," said Theodo.e T. Malleson. export manager for the Royal Typewriter Company. "Fore- casting business conditions is the life of the exporter. I don't know but that it is more important for the ex- porter than it is for the man engaged in purely domestic business, and 1 am perfectly sure it is much mors complicated. "Now, what do you want to know? Anything I can tell you I will. Shoot." "Suppose you begin by explaining the special importance to the export.^ r of forecasting conditions and why it s more complicated for him." "Business," said Mr. Malleson, "is a series of swings or ups and downs. Over a period of years you will have prosperity, followed by hard times, and then prosperity again. Business al- ways goes on in just that way. it goes on in that way in every country in the world, but hard times or pro.s- perity doesn't hit every country at the same time. And that is what com- plicates things for the exporter. The man in domestic trade has to forecast for America, but the exporter ha.s to forecast for every country where ho does business and for each one sep- arately. ••The reason it is of special impor- tance to the .exporter is that he car- ries his clients on long-time credits, and foreign collections are always more difficult and take longer than domes- tic collections. If the exporter does not forecast conditions correctly he is very likely to find himself +.i<^d up with a lot of long-time credits that will be frozen credits when they lall due. He can't depend on his clients to look ahead for him and order only what they can handle. He has got to do it for them and keep their order.s down, often when they want to splash. Take the Case of Spain "I will give you an example in Spain. Spain had during the war the greatest period of pro.sperlty she has Icnown in four hundred years. Every- thing was humming. The Spanish peo- ple never had so much money. But when the armistice wa.s signed it was plain to us that Spain was going to have a reaction and especially tha* our business in Spain waa going to have a setback. '•There was a gre^t deal of political unrest in Spain and the Anarchists and Communists and Bol.sheviki be- gan to get much more active imme- diately after the armistice. That was one sign that there was going to be a business reaction. Another was the self-evident fact th.'it the countries that had been at war, where the Spanish merchants had found their Wff 'markets, would begin to produce f<er. We Kept their orders down. We wouldn't let them buy. "NVithin three months Spain was in the beginning of a business depre.ssion that kept getting worse. She has just )^a.ssed throush about fifteen months of absolute stagnation. But we were not caught by it. We saw what was coming, liquidated our .stocks in Spain, kept our accounts down, and came through in good shap'-. "Things are beginning to pick up again in Spain. The Anarchists have had to let the factories ojien and go back to work themselves to keep from •starving. Barcelona s opening up. That i.s the centre of the big industrial district of Spain. We are going into Sj)ain and selling again. The upturn has begun theie." Margin of Safety "How long a look ahi-ad does an o::- j porter have to Jiave?" "We feel that we need in our busi- ness from throe to six months. Three montlis is the minimum. We have to h.ive time to turn around before a change makes it.'^elf f. It. We have to liquidate before a dej>r..ssion and we have to be r-idy to supply the market when the re\ ival bejiiiis.'" ^ "SupiRise you tell about genera! Euroi)e:in conditions, what you looked for after tlie war, aim the steps you took." '•<»i coui.se, thci v ^p.cial con- ditions aff«-eiinK oyj i.usinehs. But that i.s true of every hui^ine.s.s. Every business man must form his own judg- ment on conditions as he .sees them. "We looked over the situation after the war and we saw that the Kuro- pean (JovernmenLs were loaded uy with machines that they would want to get rid of. That meant that ws would have the competition of a lot of cheap machines that would go into the hands of small dealers and deal- ers in second-hand machines and be sold for extremely low prices. There was another comphcation. As soon as the war was over the European Governments began putting on th« taxes. There was a lot of talk about it first, but the talk was enough to scare the people and stop buying. It so happened that after the taxes were levied there was a period of extrava- gant buying. People bought every- thing they saw. whether the-' needed it or not, because if they didn't spend their money, they would have to pay it to the Government in taxes. But that period of extravagance didn'* last long. The high taxes very shortly had the anticipated effect of stopping buy- ing. "Altogether, we felt the outlook was bad for European business. So w« started in to liquidate our European accounts. We cut prices and sold our stocks out below cost wherever it was necessary. We felt it was better to take a loss than to be tied up with a long list of frozen credits. We are about liquidated now and ready for the new business that is showing signs of developing. Europe Going Back to Work "The best sign is that Europe Is going back to work. For a time the people of Europe ^elt that the situa- tion was hopeless. They couldn't se« any use of working and they Just waited for something to happen. But they have begun to realize that they have got to go to work and business is starting up again. "France is humming. The Govern- ment is doing a lot of work. The railroads are building and there is extraordinary activity in the devas- tated regions. The Government re- ports show only 15.000 or 18.000 people idle in all Fiance. "England has had a lot of special conditions to contend with, both polit- ical and labor conditions, and there is a tremendous amount of unemploy- ment there. But England is gettinff back to work. Belgium is probably the most prosperous and industrious of all the European countries. Ger- many has a surface appearance of great prosperity, but I look for a biff smash there, the biggest she has ever seen. Sweden has got a ble smash coming. She hasn't begun her readjustment yet, and the people are in a riot of spending. But they are going tt) get it and get it hard. Nor- way depends almost entire'y on ship- ping, and she is suffering badly. The banks are carrying many of the big- gest Norwegian concerns to keep \ }f ■^ --''■' .^ f/ 28 THE BUSINESS CYCLE them from going to the wall. Den- mark is better off because she Is largely an agricultural country, but outside of agricurture her business is dead. In Turkey there is lots of activity, but very little money. It is a case of barter. Everybody is trad- ing merchandise, and very little cash changes hands. Exporter Has Complex Problem ••y. ;i 5^rp how it is with the exporter. Every couniry whaie he does business presents its own problem. The ex- porter has to look ahead at world con- ditions and he has to look at each country as a special problem- ' But he has to look ahead. He has to forecast conditions. As 1 explained in the case of Spain, it isn't only a question of selling goods. We could have sold hundreds of thousands of dollars' worth of orders in Spain, but if we had we should have been tied up with just that much of uncollectible debts that we would have had to carry for two years or more. That wouldn't be good business. "Now we have our foreign business liquidated, we can see the revival com- ing, and we can put our„factone3 to work on what we can foresee will be a steady, continuous output for our export t/ade, and we are abl< « • iAnfiflHi "I liegan to try to pull in and hold down. But it was only possible in a very .small degree. We couldn't turn down our customers and refuse orders. We had to meet the demand and to do that we had to go into the market and buy at current prices. "The result was that we carried big inventories and because of our orders booked ahead we had to buy ahead. The first tremors came in October and November, 1920. I closed down harder than ever f.icri. We bought nothimr that was not absolutely essential. Still it was not possible to clean out the inventories. We had the orders ahead and we had to piepared to fill them. We had to buy ahead. "When the crash <'ame we stopped all buying of all kinds. The material that we had houglit ahead we accept- ed, but we didn't buy any more. Lots of people cancelled their orders, but it didn't seem to me to be fair. TIih men I was dealing with were in th-:; .same position we wero. If I had can- celled my orders they would have had to cancel, and if thp movement had spread we might have had a panlo like 1907. Held Down on Buying "No, we accepted what we had Ijouglit ahead, wrote down our inven- tories, and filled our orders. We were fortunate in having orders for our goods booked ahead and very few of our customers cancelled on us. Those who were in a bad position we com- promised with, making terms that were fair to them and fair to us. r s "What w^e did was to hold down on buying as hard as we possibly could m anticipation of the crash which we saw was inevitable. By do- ing this we were not able to come to the crash free from high-piiced in- ventories, but we had held our inven- tories down to the limit and we didn't have to lake the loss we must have taken if we had bought with llie sam« freedom m the last half of 1»"0 that we did in the first lialf. Everybody had to take a loss, but we saw the crash coming and kept our loss down, That was the story." "In managing youi- busine.s8 do you find that l>usiness statistics and chart;* are of \alue to youV 'Oh, i es. We make a great deal of use of such material. We have a sta- tistical department and an exfensive clipping bureau and we take several statistical services. We chart price trends, pioduction and the monev mar- ket, and keep a close watch on these things all the time. All of these ser- vices, I harts, and tables ar«> passed around among our executives to keep them constantly up to date on condi- tions and help them to form their judgments. The busine.ss man can't manage liis affairs solely on hunches. He must have the facts. Business is too comi)licated a matter for any man to try to get along without the latest and jnosi complete infonnation. - ■"Business runs in a regular order. The lenKlh of the periods of prosper- ity or depression may vary, liut the order doesn't. Depression follow.-* prosperity when prices get too high and inflation has gone too fai. There must be detlation then, which is to say depression. And out of depressioii prosperity grows again as a re.sult of lowered prices and accumulation of buying power through thrift and hard work. "I think we hive come now to the turn from depression towards pros- perity, but 1 think the revival will be slow. We won't have a boom next year and it is lucky for us that we won't. It we were to have another big boom in the ne!xt two years, we would have a crash afterwards to which thi.s one would be child's play. But if we have a gradual building of piowperity. we can look for a sustained period ot good times." , THE BUSINESS CYCLE \\ y i k 27 November 4 Lessons Learned by Du Pont Co. In Recent Slump The experience of a great com- pany whose statisticians foresaw the crash, but whose sales, produc- tion, and purchasing departments saw only an everlasting boom. An Interview by Fred B. Pitney The business depression from which the country has been suffering has taught the Du Pont company two les- sons. The first lesson is the value of economic research and a comprehen- sion of the fundamental principles of the business cycle as an aid to busi- ness management. The second lesson is the necessity for a single executive head as the final authority in big business management. Committee management is all verj-^ well, in the Du Pont company's experience, in boom times, but it falls down badly in the crisis — or more exactly, when the crisi£ is approaching. An official of the General Motors Corporation, a Du Pont subsidiary, toid the story. "I became interested in the bearing of economic research on business man- agement in 1917," he said. "I was w-ith the Du Pont company at that time. We put in a research btureau and began to gather and study statistics on the business situation. Pretty soon we enlarged thp bureau and began to prepare and distribute to the execu- tives a monthly summary of general business conditfons with a brief fore- cast. "We came up to the boom times of 1919 and 1920. Our research bureau was constantly and insistently warn- ing us that the break was coming. But our executives couldn't soe it. We had three big factors to contend with that it was almost impossible to con- trol. "There was the sales department. It was booking orders away abeaa ami It couldn't see any reason to think a crash was on the way when orders were so far ahead of production. "Then there was the production de- partment that couldn't keep up with orders^and was constantly calling for new construction and more material to work with. It couldn't see a crash \mder way when it couldn't keep up with the demands made on it. "And there was the purchasing de- partment, that saw prices for materials steadily rising and could readily fore- see the time when the margin of profit would be wiped out, if it didn't lay In big stocks ahead. They couldn't see a crash in the face of rising prices. Statisticians Saw Trouble Ahead "The statistical department could see the crisis coaling. By conoaring present conditions with past booms and crises it could see that the time was rapidly approaching when the boom w^ould break with a big crash. It warned us insistently. "But we were up against committee management. Each committee had its own point of view. Sales insisted on the orders ahead. Purchasing couldn't see anything but rising prices. "A few of us could get the lesson taught by the research bureau, but we were outvoted by the optimists. And there was no one man at the head who could take all the factoi-s and coordinate them and issue final orders. We who could see the crash coming were able to exerci.se some control, but not enough. We kept down stocks and inventories to a certain extent, but we couldn't do anything Uke enough. One executive at the head could have imposed his will on all the subordinate executives, and whereas we did very well, considering, we didn't make a record to write songs about. Abolished Committee Management "But we learned a lot. We learned the value of economic research and we have enlarged our statistical work. And we changed the Du Pont organi- zation and did away with committee management. "That experience teaches another thing," he continued, "and that is that business can never be made a thing of purely mathematical calculation, very fallible factor of human judg- ment. You may have the most com- plete statistics that can be gathered, and in the end it comes down to the judgment of the man who reads the statistics. ''The difficulty we are finding now i.s how to apply the results of eco- n;>m!c research to the management of a i^articular business. What we have now gives us the general trend of the business of the country. We can form an e.stlma(e of where the country is In the business cycle. What we need to know is where our own particu- lar busine.cs and our own company stand. We need to tit- our general view to a particular forecast. "We need an eslimite of probable sales over a period oT time: an esti- mate of colleetions, whether credit must be long or can be short; an estimate of our cash position with re- lation to the collections estimate; an e.'^timate of costs, prices of raw mate- rials; and an estimate of production, costs, and quantity. All this must be not for the present, but as a forecast. Only Incomplete Statistics Available "So far, we have not found whe>-e we are going to get the figures for those estimates, the statistics. We can see whore some of them are to come from incompletely. But wi'Ti the best we can do, it will still re- ' main in the end a matter of the human factor, the question of th» Judgment of the man who reads tb« statistics. "AJl that I feel I can say at present is that economic research gives a basa on which to rest a judgment. And economic research has succeeded as yet in giving us only the figures need- ed to indicate the position of th« country as a whole in the business cycle. We are still groping for thA information needed to be able to mak^ a sufficiently accurate forecast fo) a particular business. "Take the case of the automobile business. For all of our economic re- searches I don't think General Motors did any better or any worse than th« average automobile concern. We all got hit. "Right up to the end of 1920 the outlook was all for a continuance of the boom. Statistics proved that there was going to be a break. Warning after warning was issued of what was coming. But in spite of all the warn- ings the ordere for automobiles at the high prices continued to pile up. No one heeded the warnings and the coun- try continued to plan to buy automo- biles and to order them long in ad- vance. "We couldn't ignore the orders. We couldn't refuse business and draw out of the market. We might as well have liquidated our business and wound up our affairs. The only thing we could do was to prepare to fill the orders, buying as little in advance as possible. But being so far behind on production, we had to buy ahead. "All those problems are part of business management, as well as studying the statistics on the general situation of the country. Every busi- ness is not only a part of the whole but individual. Big Inventories Remained "The result was that the automobile business of the country came up to the crash with huge, high-priced in- ventories and overflowing order books. The crash was followed by a general cancellation of orders, but the inven- tories remained. "And there you are. Economic re- search showed us that a crash was in- evitable. The special problems of our own business involved us in it. We suffered neither more nor less than the avei-age of the industry. Whether we can ever get the specialized informa- tion that will enable us to keep out of such entanglements "I don't know. What I do know is that we can see its value, if it can be found, and we are searching for it, and whether we can get that special information or not, we know that it is invaluable to us to know the general trend of busHess and the position of the luntry ae a whole in the business cy^ie." 4'y 1 ? THE BUSINESS CYCLE 28 THE BUSINESS CYCLE November 5 ■ • ^^Guessworkers" Do Not Survive Business Crisis Preparation for business life should include study of the Business Cycle as a compul- sory feature. Widespread understanding would help to modify extremes of in- flation and depression. Sam A. Lewisohn Of Adolph liBwiaolm h Son*, Mioinx •nd Id- TMtmenta. (Interviewed by Fred B. Pitney) "One of the most surprising things about the business cycle," said Sam A. Lewisohn of A^dolph Lewisohn & Sons, "is how few people know anythinit about it. And yet it is a constantly rceurrinr phenomenon of the business world. Though many of the underly- ing causes of cycles are obscure, th« general course of events that tak^ place Is comparatively simple and would be easily understood by the av- erage businc-ss man. "There Is nothing rtmarkabl*' about a period of br.siness d .'pression Pros- perous or boom times are not the nor- mal condition of affairs, with depres- sion or hard times ao unforeseeable calamity. The law that depression fol- lows prosperity would seem from past experience to be almost as inevitable In its action as the law of gravity. "The really remarkable thing about hard times is that so few business men realize in periods of prosperity that hard times are bound to come and make provision against them. And that very lack of realization make<) the hard times haxder, makes the re- covery more diflScult and makes them last longer and the recovery slower. "Yet these conditions could be so much mitigated if the average business man only had a little knowledge of economic principles. We ought to teach economics, and especially a knowledge of the Business Cycle, in our schools as a compulsory study. Instead of, as we do, sending our average young man out to enter the flfht for Mfe with practically no prep- aration for what he is going into. "The great captains of industry, the successful managers of big business, do, to a certain extent, at any rate, understand the principles and theory unconsciously, they conduct their busi- nesses on sound principles. That Is what makes them successful. But the average business man does his busi- ness by guessing from day to day. He doesn't think of the underlying prin- ciples or see things from a long-range point of view, and many of them would laugh at you if you told them there was an underlying principle Understanding Woulcf Modify Curve Curve "I don't mean to say that a general understanding of the Business Cycle would eliminate depression and keep the country on a general level of con- tinuous prosperity. We will, perhaps, have to wait for the millennium for that. But 1 do mean thai a wider dif- fund for insurance against the hard times to come. Experience of the Gue$s%vorkers "The temperamental business man. who works by hunch and by guess, finds himself, as he euphemistically expresses it, overextended when the crisis comes at the end of prosperity, and he goes to the wall. But the wise business man. who understands the principle of the Business Cycle and acts on it, finds himself not only pre- pared for the period of depreasion, but ready in those hard and dull timaa. when prices are low, to expand his facilities, do his new construction work when building is cheap, and contract far iri advance at low prices for his stock-s of goods. He will not only weather the la^i^ time., but he will fusion of economic knowltc'ge would be pi osperous above the general level make the curves of business less sharp, in good times, because he has prepared would keep the peak, perhaps, from i for prosperity a« he had previously rising so high; would make the high prepa ted for depression, level of prosperity last longer, and •'Thai is the advantage lo the indl- would prevent depression from going vidu>.'l of conductine. his business ac- to such low levels and lasting so long. | cording to a definite and easilry vndtr- "It is just as w.th an over-temper- j stood economic principle. The advan- amental person. We ail have moods I tage lo the community if all busamaas, which make life interesting, but when i or the major pa i of ihe buainoss, af a person gets too liish and then too {the country could be conducted undar depressed we ronsider the condition ! thai piinriple is too obvious to naaU pathological. "In Europe economic know'edge is more widespread than here and in Eu- rope the average Business Cycle ranges through a period of from seven to ten years, while here the period varies from three to ten years. Doubtless there are temperannental differences that account for this in part, but the point I want to make is tnat a knowledge of economic principles would enable us to exercise a wise control over our tem- peramental flights, instead of running wild. "The wise busmess man who is famihar with the prin(;iple of the Business Cycle knows that depression must inevitably follow prosperity, and within a eompai-atlvely biief period, a few years at the best. There is a great temptation to unlimited expansion in prosperous times to put off the day of saving and economy. It is part of our national temperament. We are over- sanguine. But the wise business man looks forward in prosperity to the in- of Uae Business Cycle. Consciously or evitable reaction and lays aside a comment. 'Now. I Jon't mean to say that any man can maUe an acc.irate forecast of just when hard times will come or when prospeiity uill return after •* period of depies^sion. But he can real- ize I nut both ant inevitable. He can do Ills new construction in hard timc!« at low prices, or he can contract for it tthead during periods of deprossioc. whon prices are low, and he can con- tract for his stocks ahead during it- pression periods. "I don't mean that he can fore«te all his wants But he can foresea a large part of them. And by foreseeing them and giving out his contracts dur- ing hard times he will contribute to hasti?nin.'y the return of prosperity, he will help prevent the depression from reaching such a low point, and he will help make prosperity last longer. 'If the average man, through a little study, will come to underatand that there is a definite principle underlying the general course of business over a period of years, he will soon come to the further realization that the combi- nation of his individual efforts with the Individual efforts of thousands of other busi.iess men can g-o far towards refu* !atinK the progress of the Businaaa Cycla." -4i -i 4^ i^ Bi > I: k Y- Ih November 7 How a Big Toy Firm Handled Itself in Anxious Times J. Uonel Cowen Pr-^K1iat Uobe! Ktnufacturlnx Co. Uattrriewed by Fr«d B. Pitney) Before the war the American toy- making business was negligible, and since the war it has again had a hard time. One of the reasons for the hard times since the war was the mushroom growth due to war condi- tions, which put it on no aohd founda- tion to meet the depression of this year. Some American toy makers, however, had the vision a year ago and two years ago lo see what was on the way for business, and have come through with flying colors. One of these was J. Lionel Cowen, presi- dent of the Lionel Manufacturing Company. Mr. Cowen, in telling of the experi- ence of his company, said: "We ought to atart this story at the beginning, which is back in 1913. Up to the begin- ning of the war only about 1 per cent of the toys sold in this country were made here. Germany had a monopoly of the American toy trade, though tiiere w;.s some competition from other countries. But Germany was the chief source of supply. "In 1914 American merchants were still loaded up with German to.vs, but in 1915 no German toys came in and American toy makers got their first real chance. By 1915 the situation in the American toy trade had exactly reversed itself. For 1915 and the next three years 90 per cent of the toys told here were of home manufacture. "Then came the armistice, the re- svunption of imports, foreign compe- tition, and the business of American toy makers began to dwindle so that this year only about sixty per cent •f the toys sold in Amerioii will be of home manufacture. America Makes Better Toys "If It were only a question of price, the American toy manufacturer would be driven entirely out of liie market again. But the American niake» a better and stronger to.v than the for- eigner. In many cases he does not put quite so much finish on his toys, but where he has the edme is that he puts stability into ihem. His toys cost more, but the dealerj* and the people have learned that they get more for their money. So the Aineri- can manufacturei' has held a very con. siderable pari of his market by the value he gives. "Now, we come to the bisgesi blow the American to.v maker had lo stand. That was the business depre8.sion that swept over the country with such .start- ling suddenness. "You see, many toy makers figured that they had captui*ed the American market for good and all. They laid In their stocks of material and made their manufacturing plans on that I am glad to say that we are comiac baais. So they came up to 1920 with up to the end of the year with all the biggest inventories in their history. | signs "-ointing to the turn of the tida "Now, here was the situation with } in business. By the end of the year our company aa it developed in 1920. «'e will have equalled our IStf We had every reason at the t>eginning of 1920 to look forward lo the biggest year we had ever had. As a matter of fact, we did have our biggest year, but at the beginning of 19S0 it looked as though it was going to be a whole lot bigger. We were sold out by the end of March, with orders still piling up. 'i\ looked like ii wa.s up to us to double our output. But it was about that time we had the first signs of the storm. Prices were way up, then, you remember, and 1 began lo notice a ii(- record. The upturn having begun, what la going to be your policy now?" "When prices are dovfn is the time to buy," Mr. Cowen replfed. "I figure prices are just about at the bottom row. In fact. I think they are going lo begin to go up. But any one who >"uys now will make money on hln purchase?, no matter wheth«»r prices are not quite at ;iie bottom or wuethc* they have begun to go up, because they arp goinsr lo go up a jrood deal more. So the man who buys to-day lie cessation of buying around l he i will liave the edge ou the man who country. 1 don't mean that our orders waits .* few, months and as a cona*^ fell off. but there was a falling off in queiice has to pay h. higbei price, the retail trade. There began to be -.j^sf !., prove mv belief. I will tell price cuttmg. Then, you remember. < , ou that a tew duvsago I bought 1 O0f John Wanamaker sprang his first big price slashing sale. .\(ter that, overall parades were held in several cities. "1 didn't feel that I needed any moie signals. Things liani sone far enough. We had reached t1i« top and were ready to start on the down giade. I said, *We won't go out for any more orders. We will be satisfied with what we have. We are Koing to have some cancellations of order." already on our hooks and we will take just enough ton.s of brase. I don'' need it to^lay. hut I will need it next .vear, and I will have it very close to the bottom of the market, if not exactly at the bottom. And all yon need i» to bny pretty close '<> the bottorn. It is mighty easy to ,ver»-oach yoi-rRe'.r by trying to grab the. last penny. "I iook Lor much better business next year than we have had ^hi^ yeai . and I 11 buy anytjiing now, jf the price right. Anything . . .. ^. . '-^ right. Anythmg 1 am arong t« new orders to <;over the cancellations.' „eed in my business next yea;, that is. In this businesa we have to btiy oui raw material in advance. I had a lot of orders in. of course. I didn't cancel them. J didn't cancel an ordc''. Bui I made a new arrangement about them. I went to the people I had ordered from and i said, 'Til take ail this stuff 1 have ordered from you. I won't cancel ;i pound. But these orders are for future delivery, and you mii.st give uie the stuff at the current price on the date of ship- ment.' "They were moie than glad to make such an arrangement. And thai let us oui of carrying big, high priced iiiveiitories. We used up every poimd we had bought in advance for our 19»'0 busine??!. We didn't oversell our market and find ourselves with a high petxeutage ot cancelled orders after we had the goods all made up. and we didn't have to make enemies by insist in$^ on ouj (Mistoiners taking goods thnt we knew ih^v couldn't .s»}l. Feeling liie Way in 1921 "The same policy baa brought us through thix year in splendid shape. We liyvo done ju«( as much business this year «••< we did in 1320. and it la all done on » sound basis. VVt> stopped going out after business ui 1920 because we felt anything more would be shaky: it would be an over- load. This year we haven't tried to crowd the market. We have been conservative and felt our way, and I 'The way it looks to me, we »r* leaving a little boom just at present, Uui that wiU work itself out bv the end of the year. Then we will have a lemnorary recession that will last through Ihe first two or three month» of next year. In the spring things will open up again and from then on wo will have steady progress until in- flation once more goes too far. whea we will have another depression. "We are on the upturn now and the thing to do i» to take advantagre of the prosperity that is on the way re prepare for the .storms the future holds." "Did yuu have to cut wages in or- der to come through the depresak>n?" "1 didn't have the heart to 4o it. We thought it over and came to the conclusion we w^ould have to malce a cut. We even set the date. But j VI hen we came up to the date fixed. ; we put it off and set another data. j We did that three times and w« j Itaven'i cm wagen yet and don't in- tend to. 'The workingman has already loat his overtime and that's about all the ( nt he can !rinclple. My first job is to pick the conncll, and then I have to sell my- self to them so that I will get their loyal ' codperation, and they will come here to my office and fight me to the last ditch on any proposition they don't believe In. Bvit after the de- cision is made they must fight just as hard to put the proposition over. "Business management is largely a matter of picking men. If you can pick the right men their combined judgment after they have fought a question over will be right ninety- nine times in a hundred. "Now. you want me to tell you what I am going to do. I can't tell you. As questions come up to me. I'm going to try to meet them with the tighx answer. After it is over. If I've fouafl the right answer, I'll take all the praise you want to give me." "On the contrary', Mr. Brush, you have told what you are ffoing to do. In your own words, 'the big thine 1* i<* know when to let go and take a fresk bite,' and as you have described it. yom are going to take a fresh bite." "Well, leave it that way." How the Business Signals Read To-day This summary presents in concise form the general trend of opinion on business conditions about the latter part of October, 11»21. A long lint of bankers was asked to answer these questions: (1) Do ybu anticipate pronounced improvement during the rest of the year? (2) If not, what kind of business do you anticipate? (S) When do you expect pronounced improvement? (4) What are considered the chief retarding influences? (5) How do stocks on the shelves of retail merchantfs compare with normal? («) When do you expect credit conditions to return to normal? (7) Of commercial loans outstanding October l, approximately what percentage represented frozen credits — that is, lenewals oi ex- tensions of loans made more than twelve months ago? (8) Approximately what percentage of frozen credits? outstanding July 1 remained unliquidated on October 1? (9) What are the prospects for further liquidation of frozen credits in your district in the near future? Wholesale and retail clothing, iiai-dware. and grocery merchants were given this list: (1) year? m <4) (5) Do you anticipate pronounced improvement in business thi.s If not. what kind of business do you anticipate? When do you expect pronounced improvement? Whiit do you consider the chief retarding infiuonccs' How does the value of your merchandise on hand Ociolx^r 1 compare m percentage with one year aso? With two \eai.s ago (6) How does the physical quantity of .such nierehandi,'!»» pare with one year ago? With two yeius ago? t;tjm- From the telegraphic replies as they were originally Evening Post, the following statement ha.'; been deduced: The third part of this series, as out' lined in the introductory remark-s. gives the reading of the business sig- nals as they stand to-day (about No- vember 1, 1921) by the leading bank- ers and business men of the principal sections of the country. What they have to say is summarized here. piuitt-d in the In the Middle West Ten bankers see no signs of pro- nounced improvement this year, bin all look (for gradual improvement. Two think there will be pronounced improvement in six to nine months. The others think conditions will work slowly back to prosperity, but set no definite limits. In the East Three bankers see no signs of pro- nounced improvement this year. One thinks there will be slow improvement this year, and two think that .slow will grade up to moderate, while one thinks the improvement will be .spotty. Two expect pronounced ini- provenront in the .seeond quarter of next ytai, while one thinks pro- nrunccd improvement is two years away. The othoi- doesnt expect a chatrse rrnlil the tariff ;tnd tax qire.'*- I tion.>< jiie disposed of. t In the South Six bankers rxpect a pron<»urrced improvement this yeai. thrive do not, and one thinks the improvement will he spotty. Three think there will be little change in i ondition.*? for tire re- mainder of the yea;-, vvhik five expect steady progress. Two expect a marked inrprovement after- the first of the year and two others, while rrot sK^tting a definite date, look formaiked improve- ment in the near future. Two others set the return to prosperity after the next crop and one puts it a year away. Three think progress will be slow. In the Northwest Four bankers do not look for any pronounced improvement this year, one thinks there will be aome im- provement this year, but not a ipreat deal, and two expect poor business for the remainder of 1921. One thinScs tha situation will be spotty. Tiwo look for a pronounced improvement next spring, and three not until next sum- mer. In the West Two bankers see no hope of pro* nounced improvement this year but all four agree that there wHl be sraCk ual improvement. One puts pr»> nounced improvemenr a year away ;^nd one places it after the next <:t^ season. On the Pacific Coast One banker expects pronounced Ifl^ 1 rovemeni this year, fom- see no hope foi this year-, but they all look for a gradual and continuing improvement in I'ondiiions. and one expects to see a pronounced improvement by spring. Two do not expect a pronounced im- provement until Congress settles the tariff and tax questions. In Canada One bank looks for a continuance of depresion in Canada for another }.eai-. Ti'.f^e repojts from forty-threa banks scattered well over the countiT shci-v that lire South is the most optimistic section and the Northwest sees thia^js in the darke&t colors. The tonsensus for the country is that the upturn has begun, but the South is the only section that takes a reall.v cheerful view for- the remainder of 1921. The Middle West is perhaps the most depressed (outside of tlie Northwest) about the rest of this year. But the Middle West looks for- ward hoj)efully to 1922. Practically the entire country looks to 1922 to show a marked return toward prosperity. The variations are chiefly as to how eariy in the year- the up-swing will be in full motion. The majority favors a .steady ratio of improvement through the first half of the year with a comfortable measure of prosperity by the end of the ihii-d quarter. >> S^' >- \ .• ^^^ 22 THE BUSINESS CYCLE Among merchants reports were re- ceived from five wholesale dry goods firms In the Middle West, one in the South, and one in the Northwest. They all reported improved business at present with prospects of a steady ratio of improvement continuing through the remainder of the year. The firm In the South expects a com- plete recovery to normally prosperous conditions to be slow, while the one in the Northwest expects a pro- nounced improvement by next spring. The Middle Western firms see gradu- ally improving business until after the next crop season, when they expect pronounced improvement. Wholesale gi'ocery and hardware firms were equally optimistic. Re- ports were received fromUhree in the hast, one in the South and four in Vie Middle West. AH reported pros- pects for steady if slow improvement [n business for the remainder of this year and the first months of 1922. Estimates for a reasonable expecta- tion for a pronounced improvement varied from next spring to next fall. Retail dealers take a less cheerful view than the wholesalers. The field surveyed covers the retail clothing, grocery, and hardware business, five concerns reporting from the Middle West, four from the South, and five from the East. The Middle Western firms look for fairly good business With gradual Improvement during the remainder of this year and the early months of 1922. But only one fore- Bees a pronounced Improvement by ■pring. The others think any consid- erable degree of imprqfc'ement must wait on the settlement of the tariff, tax, and transportation problems, with railroad affairs bulking large. In the .South improvement is expected to be gradual with much depending on next year's crops and prices. The East finds some increase in business now with i^ro-spects for gradual im- provement. Two firms expect good business by spring, and one expects pronounced improvement by next summer. Bankers and merchants are thus in agreement that the upturn has be- gun. There is considerable divergence of opinion as to the time when there will be pronounced improvement, with the South the most optimistic section of the country, and the North- west the least cheerful, but there is substantial agreement that there will be no sudden boom and that the im- provement will be gradual. The aver- age would fall on next summer as the time when the general business of the country is most likely to feel once more the enlivening effects of a pros- perous era. Freight rates, tariff, and tajfe.s are the influences most widely considered to be retarding the business revival. After them come wages and prices. There i.s a general demand for lower freight rates, lower wages, and low- er prices. In the Middle West, South, and Northwest farm prices are given an important place as a retarding in- fluence. Prosperity is not expected in those sections until the farmers can get better prices for their products. In the grain and cotton States the European business situation is held to be of particular importance. Disarma- ment and prohibition are both nv n- tioned among the retarding influent .<;. Disarmament is desired, while pro- hibition is considered Inimical to -.* prosperity. ^ With few exceptions retail stocka are credited with being depleted throughout the country. Estlmatea of the value of retail stocks, as com- pared with a year ago, vary from 50 to 90 per cent. In very few ceMea are J they estimated as being of equal value ^ ' with a year ago. The credit situation la apotty, but in general it may be said that reports from all sections show' Improvement. Commercial credits are In much bet- ^ ter position than agricultural credltp. ~> ) With the exception of the cotton credits of the South agricultural. cred- its are far behind in liquidation and bankers generally expect liquidation of agricultural credits to be ' a ^ow proi;ess. -.4 ^ The estimates of the percentaisre of frozen ci'edits included In the com- mercial loans outstanding October 1 varied so widely that the only way to arrive at a figure is to average them. The estimates of eighteen ^banks .4. averaged thirty-nine per cent as the proportion of frozen credits in the loans outstanding October 1. Arriv- ing at the figure in the same way, sixty per cent of the commercial loans outstanding July 1 were still un- liquidated October 1. The prospects for futher liquidation are considerered good as a general rule, with agricultural loans again lagging behind commercial loans. Seveml estimates fix six months as ^ the time needed for full liquidation of T * commercial loans, while the average of time considered necessary for the liquidation of agricultural IwuM 4ota not exceed a year, A\ 1 . > V r * ^ \ V f Four Essentials of Financial News A. .CCURACY, convenient arrang-ement, speed and wide scope — these four are the very essence of financial reporting. Are you getting them in your evening newspaper? Read the Evening Post and you will get them all. For years the Evening Post has had a reputation as a financial authority which has reached throughout the United States and far beyond. That reputation is based on accuracy. In many of the brokerage and financial offices in New York the bond price tables, the Stock Exchange and the Curb Market summaries of the Evening Post are clipped and filed. That is done because they add convenient arrangement to absolute accuracy. The Evening Post is depended upon by many in the financial district to bring them the first full account of the day's trends and trading. » That is because it shows speed. The Evening Post is the first after- noon newspaper on the street with complete "high-low" c[uotations. Let any business man whose interests are wide and whose invest- ments are diversified tell you what he thinks of the Evening Post's daily financial news and weekly financial section. "Indispensable" is the word he's most likely to use. That is l)ecause of its scope. From the great financial centre of London there comes to the Eve- ning Post alone the unique daily cable of Arthur W. Kiddy. One of the governors of the Bank of England characterized Mr. Kiddy as "the best informed man — the most dependable" of the financial writers of London. ^ A\ i "S »'4 .'f < h^^ O'^l^i \!!r|j i^C JIN 3 v/ 1995 0044247265 Date Due ¥ a %i jDm 1 QU1 1 i lyao END OF TITLE